John Hussman on Google

An interesting take on Google’s current valuation and possible future returns from the manager of the Hussman Strategic Growth fund:

“Let’s assume that Google is in fact, the next General Electric, Microsoft and Cisco Systems; that investors buying the stock here are, in fact, getting in on the ground floor. What sort of return can those investors expect over the long-term?

Let’s see. OK, we know that total global advertising (television, radio, magazines, newspapers, billboards, and so forth) represents about $350 billion at present, and is projected to grow about as fast as the global economy in the future, about 6.5% annually, according to PriceWaterhouse Coopers. Total internet advertising is currently about 6% of that total, but let’s project that 15 years from now, the internet share booms to 20% of all global advertising. Let’s also assume that Google gets 75% of it.

That puts Google’s revenues 15 years from now at $135 billion a year, which is close to those of GE. Let’s also assume that stock market valuations remain at a permanently high plateau, and that Google gets awarded the same rich price/revenue ratio of 2.4 that the market awards to GE, which again, is the most generous price/revenue ratio awarded to any stock with revenues over $100 billion.

We now have everything we need to calculate the expected return to investors:

Price_future / Price_today = (Rev_future / Rev_today) x (P/Rev_future / P/Rev_today)

= ($135 billion / $3.8 billion) x (2.4 / 20.5) = 4.159

which implies an annual return on Google of 9.97% annually.

What if Google is the next Microsoft and Cisco Systems? Well, MSFT has about $38.9 billion in revenues, and CSCO about $24.2 billion. So $31.6 billion on average, with an average price/revenue multiple of 6.0. Let’s assume that Google gets there in just 10 years.

Do the math:

($31.6 /$3.8) x (6.0 / 20.5) = 2.434

which implies an annual return of 9.30% annually.

Suffice it to say that even taking as given that Google is, in fact, the next GE, Microsoft and Cisco Systems, investors buying the stock at its current price aren’t in for big returns.”