Fortune writer calls Google a 'pipe dream'

Posted Jul 30th 2007 8:00PM by Zac Bissonnette
Filed under: Magazines, Google (GOOG)

Google's (NASDAQ: GOOG) disappointing third quarter brought the bears out of the woodwork. In a recent column, Fortune Magazine's Geoff Colvin makes the case that Google is overvalued.

Sure, it's a great company with terrific management and it has generated tremendous value for shareholders. Colvin essentially argues that Google has been earning extraordinary returns on capital and that, just to maintain its current price level, it will need to earn even better returns in the future. As Charlie Munger has said, few businesses have a future as good as their past.

Anyone who owns shares of Google or is considering buying should read Colvin's insightful article. Given the extraordinary returns, thousands of brilliant young minds are working around the clock hoping to dethrone Google's leadership position.

I would be careful with this stock.

Tags: Fortune, GOOG, Google

Print this

Reader Comments (Page 1 of 1)

7-31-2007 @ 10:33AM

Josh said...

Interesting article, but the EVA predictions don't make sense to me. Colvin suggests Google's EVA has to grow by $2/year. But why would the growth be linear?

Asssume, instead of linear EVA growth, a growth rate of 50%. This would mean an increase of $1.2B over the next year, followed by $1.8B, $2.7B, $4.05B, and $6.075. This would mean that in just 4 years the company would reach $12.15 billion EVA. If you assume an EVA growth rate of 39%, you hit $12.45 Billion in 5 years.

This is still a very steep curve, but the company has what management referred to as nearly unlimited potential for growth. With the best talent in the business (because everyone wants to work there) and numerous revenue sources it has only begun to tap--international markets, wireless services, desktop software, customer-tailored search content...the list goes on--it looks very plausible that they'll be able to achieve this growth.