Steven Ballmer, the chief executive of Microsoft, recently sent a sly but unmistakable message to the executives at Google. Think of it as a sobering peek into the future, written by the leader of a longtime Wall Street star for the benefit of its latest boy wonder.
There are "soon-to-be-public companies," Ballmer wrote last month in his annual e-mail message taking measure of his company and the technology industry, "that will deal, as we have, with flat stock price for a number of years while they build adequate profits" to justify their stock price.
Take it from a behemoth now suffering from middle-age aches and pains. The inflated expectations of Wall Street might seem a validation of your hard work and potential, Microsoft's chief executive seemed to be saying, but over time it will also be a burden -- maybe even a curse.
Ballmer's message might well have been directed, too, at all those investors now contemplating whether they should pay an extraordinarily high premium to own a small piece of Google, the world's most popular Internet search engine, when it finally goes public, probably in the middle of this month.
According to a document it filed last Monday with the Securities and Exchange Commission, Google expects to be worth US$29 billion to US$36 billion the day it goes public. That would instantly give this company, hatched in the late 1990s, a market value greater than that of Ford Motor, Starbucks, Federal Express or Lockheed Martin, though Google generates a small fraction of the revenues those brand-name giants do.
`unqualified no'
"If an investor asked me, `Should I bid on this stock?'" said David Menlow, the president of the IPO Financial Network, an independent research firm, "I would respond with an unqualified `no.'"
Yet one man's "financial train wreck," to borrow Menlow's phrase, is another's rare chance to magically transform a modest stash of cash into a single-stock retirement fund.
"Google might look ridiculously expensive," said Michael Moe, the chief executive of ThinkEquity Partners, a research-oriented investment bank specializing in growth industries.
"But Microsoft, Cisco, Qualcomm -- take your pick. All came out with a lot of fanfare and people said they were ridiculously expensive -- and all of them proved a great investment," Moe said.
"This is like making a bet on a thoroughbred," he said.
"You're paying a premium," Moe said.
Investing in a newly minted stock is always risky. More than 5,000 companies went public between 1989 and 2000, according to Richard Peterson, chief market strategist for Thomson First Call. Nearly one-third of those companies are down 50 percent or more since their stock market debut, Peterson said -- if they are even still in business.
Only one-fifth are worth at least twice their opening day price.
Moreover, this year has been a terrible one for technology companies new to the stock market. Two dozen technology-related companies have gone public this year, Peterson said; collectively, they were down more than 10 percent as of Friday's stock market close. That compares with a gain of about 1 percent in the share price for the nontechnology companies that have gone public this year.
Google is hardly just another company seeking to sell shares on the stock market. But then, that is already reflected in the share price, which is expected to be the highest ever for an initial public offering.
150 times earnings
In Monday's filing, Google said it expected its shares to sell for US$108 to US$135 each. Even assuming that Google sells initially for US$108 per share, that would make the company worth 150 times its last four quarters of earnings. By contrast, its Internet rival, Yahoo, is valued at 105 times earnings, and Microsoft 39 times earnings.
Still, Barry Randall, a mutual fund manager, is among those thinking about taking the plunge. The company's balance sheets, at least at quick glance, he said, are compelling. According to Google's most recent filing, it has a gross profit margin "in the high 80 percent range," said Randall, who runs the First American Technology Fund, which specializes in technology stocks. "Your average tech stock," he said, "has gross margins of 40 percent."
Still, it seems legitimate to ask if any company, no matter how extraordinary, should trade at such sky-high multiples. As even Google acknowledges in its SEC filings, competitors threaten its dominance in search, from Yahoo and Microsoft to any number of lesser-known rivals.
Moreover, Google can maintain its torrid rate of growth -- which it must do to justify so extravagant a stock market valuation -- only if it increases traffic on its site.
That is no easy task given that it's already the default search engine for much of the world. (That explains recent initiatives like Gmail, a free e-mail service from Google that challenges offerings by Yahoo and Microsoft.)
"The company's valuation is clearly based more on the hype factor than business fundamentals," said Ashok Kumar, a technology analyst at Raymond James & Co.
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