The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

09 April 2007

Speed bump

Today's edition of the Wall Street Journal (via reports that

Google's attempts to diversify -- into radio advertising, online video and social networking -- have flopped, leaving it dependent on its online ad business for nearly all its profits.

Google purchased d'Marc lastyear for more than $100 million. It planned to use the company's technology to automate the purchase of radio ads nationwide. But D'Marc's founders fled the co. Radio industry titans feared Google's technology could usurp their relationships with major advertisers and reduce the profitability of radio ads. So Google has been relegated to selling bad time slots in small mkts.

Or look at GoogleVideo, a service launched with limited content two years ago. It grabbed only a minuscule market share and never made a profit. After it floundered, Google paid $1.65 bln for YouTube -- which, despite being the main Internet video destination, lacked revenue. It also came with substantial legal liabilities in the form of copyright-infringement lawsuits. And the unit will face serious competition later this year from a new online video consortium led by NBC (GE) and Fox (NWS), which are banding together to create what insiders are already dubbing "a YouTube killer."

With the online ad market growing at more than 30%/year, and Google dominating the space, it may be able to pour money into these ventures ad infinitum. But unless some of them begin to pay off, the search giant's shareholders may re-evaluate the massive multiple they award the company.

To which I say two items in response:
1) What "massive multiple"? On trailing (actual reported) earnings of ~$10/share, the PE is a large-ish 47.5, but that number figures in no more growth of future earnings. And do you truly believe Google/GOOG will always and only earn $10/share? Perhaps you believe, as do I, that, on the basis of its PEG, the shares in fact are cheap.

2) That the shares have traded sideways for 18 months now in a massive long term base (circumscribed by resistance at ~$500 and support at $330) that itself allows all this fretting and worrying. ("Why no more advances in the share price?")

[click on chart to enlarge]

Note first the 18 months base since the massive upside breakaway gap in October 2005 and the second such gap in October 2006. Then note that the shares have traded in the upper end of its presumed base whose new low end would be ~$430. (A support level I have suggested repeatedly would stem declines, and which has done precisely that.)

Stated as a metaphor, this long and lengthy base is nothing other than a speed bump. An investor could view all trading between the two data points ($330 and $500) as noise; the signal would occur upon a breach in either direction. I have no notion when the upside breach will occur -- perhaps late next week after its 1st quarter earnings release, perhaps in 6 months to continue its track record of major breakouts during October -- but the past 18 months are a base, and the share price will break out above it.

Yes, the eighteen months of base building corral the share price momentum, but also help diminish its once-high(er) PE. This is precisely how growth stocks trade, especially the great ones. Of which class Google/GOOG shows it belongs.

And thus [it belongs] in our portfolios, despite the increasingly cacophonous fretting, worrying, and naysaying. (Also a common occurrence for growth stocks.) I have recommended Google/GOOG for so long and so often (since well before its IPO) that I could splash a banner over this page, "The Original Google Bull." (But I will not.)

Patience is more than a virtue, it also is its own reward. Hang tough, hold on; heady days will return soon enough. In time my (our) portfolio value(s) will receive its (their) just rewards.

-- David M Gordon / The Deipnosophist


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