Follow the execs out of this new dotcom bubble
By
Euan Stuart Dec 12, 2005
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When it comes to stockmarkets, certain themes – greed, fear, bubbles – can be relied upon to repeat themselves, says Robert Cole in The Times. What is remarkable, however, is that a new dotcom bubble should be inflating so soon after the last one burst. Stock-of-the-moment Google might be very different from the dotcom darlings of five years ago in that it is a real company with a good business that is actually making money. But there is still a distinct whiff of “mania” about the fourfold run up in the company’s stock price (to $285) since it listed at $85 a year ago. At the time, even $85 seemed a pretty bullish price to list at and many analysts (including MoneyWeek’s James Ferguson) suggested steering very clear of the shares. Today, the City is split. Some say Google is grossly overpriced, others that it could see almost limitless growth in its online sales and advertising, something that more than justifies the price – which implies that the firm will grow at 30% a year for ever.
The truth is that the price of Google is a symptom of the excess liquidity in the financial system and the low returns on offer in most asset classes. Investors with “more dollars than sense” are desperate to find anything that might just earn them juicy returns, says The Economist. They don’t care whether firms such as Google are intrinsically worth what they are paying for them, just that the positive momentum behind them keeps them moving up. With shares in Google trading on a p/e of 70 times, investing in them is no more than a “leap of faith”. It is true that the business is doing well – the Google search has become a part of modern life and second-quarter profits more than quadrupled to $343m – and that, on the face of it, the entire sector is doing pretty well. Yahoo recently announced a sixfold increase in profits, while eBay revealed a 53% increase in second-quarter profits and a 40% rise in revenues. But is this growth really sustainable? Shares in both Google and Yahoo saw a sharp sell off in the aftermath of their earnings announcements. In their heart of hearts, even the most bullish of investors know that rising competition means margin erosion and slowing growth are probably on the way for the giants of the dotcom sector. The managers of Google know this too. Not only have they just introduced a new service – web-based phone service Google Talk – in an attempt to diversify away from the search-engine business, but, in a clear sign that they know their shares are trading way too high, they’re selling more of them.
The decision by the “Googlers” to issue new shares appears utterly to have baffled the “army of overpaid analysts” who follow the company, says Alan Murray in The Wall Street Journal. But what’s the mystery? When companies think their stock is undervalued, they buy it back. “The Googlers are in the opposite fix. Their stock is overvalued.” So what do they do? They sell more as fast as they can, “before sanity returns to the market place”. It’s always hardest to recognise a bubble “when you’re being lifted by it”, but the Google boys are cleverer than most. They know what’s going on. And if you aren’t convinced, look at “what they do, not what they say”. In recent months, the top management at the firm has sold nearly $3bn worth of their own holdings and have been changing their compensation plans – using less stock options, which become worthless if the stock price drops, and more Google Stock Units (GSUs), which do not. The fact is that the company has no particular use for the cash it is raising. It is taking it just “because it’s there”. If you’re a holder of Google stock, why not do the same and sell up?
Get into Chinese tech stocks instead
If you own shares in Google, it is clearly time to sell them, but if you have an appetite for risk and still want to be in the tech sector, where do you reinvest? Chinese tech stocks might be the answer, says Paul La Monica on CNNMoney.com. With more and more Chinese consumers going online and buying cell phones, investors getting in early should “reap the benefits”.
Ryan Jacob, manager of the Jacob Internet fund, owns shares in Shanghai-based online gaming company, Shanda, and online-travel agency Ctrip, plus employment recruitment firm 51job, which has a Monster.com-style business in China. Ctrip is the most accessible in that it is listed as an ADR (one ADR represents two ordinary shares) in the US. It trades on a current year p/e of 41 times. Ctrip is growing at a good 33% a year and so has a price-earnings-to-growth (PEG) ratio of only 1.12 times (a PEG of one is considered to be cheap). Another US-listed (again as an ADR) firm is online group Netease, on a p/e of 33 times and a PEG of 0.7 times.
Still, investors in the Chinese internet sector are going to need to be prepared for volatility, says Jacob. Long term, the booming Chinese middle class is going to provide these firms with enormous profits, but those won’t come in a straight line. Make sure you don’t buy in at too high a price.
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