I beginning to find that Google is a popular topic on this blog. I think I am drawn to it because of its semi-unconventional way of doing things. I also like the way the company is attacking major competitors (Microsoft for one) with relatively little advertising for itself. In fact, Google has never advertised, at least in the traditional sense. Word spreads on websites and on webpages. I remember I was in college the first time I heard about Google. I thought the name was stupid, but when I finally got around to looking at it, I never went back (I had been an Excite or Yahoo! search engine user previously).
Yesterday, Google's shares dropped 4.7%. People think it is because of the "poor" start to the Christmas shopping orgy, but I'm beginning to think that Google might be a part of a bubble.
When you look at Google's P/E ratio, you see quite a high number. This is not normally a good sign. Today, the number is right around 80. Last week it was about 100. What is a P/E ratio? At the basic level it is the price of the stock divided by the earnings per share. What does that mean for you, the investor? It would take 100 years for Google to be able to create the earnings that its shares are trading at. Is this a rare occurance? No. Growth stocks or new companies with a lot of potential for growth often have higher multiples. The stock's price reflects the potential future earnings (remember a stocks price can be determined by the present value of all of the future dividends). But sometimes, people get excited about stocks and bid the price higher than what the company can produce, even at an accelerated growth rate. Sooner or later, as history has shown (just look at the stockmarket crash/recession of 2001) the price comes down. I'll explore this idea a little more in my next post.
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