Wednesday, October 3, 2007

I Like Being a Contrarian

So it's a little disappointing to me that so many people agree with me.

Here's Paul Kedrosky on why Google's stock is trading up as investors anticipate a downturn in ad spending.

I'll have to find something else to obsess over.

I don't agree that Google is going to $2000 (or $1000) anytime soon, as Blodget predicted. (But I think most people who were outraged by his post didn't really read it very well.) The problem is, for Google to get to $2000 per share (at least in real terms), it would have to have a majority of the advertising spend in the world flow through its system (assuming they continue to be mediocre in every other line of business except search and being an ad rep.) I don't believe that will happen, because there's just too much money at stake for someone else not to figure out a way to take at least part of that market. No one gets to completely dominate a lucrative market without some sort of rationale for monopoly.

What's the Google monopoly rationale? Brand? Spending a few tens of billion will build you any brand you want, and if the result is a several hundred billion dollar market cap, it would be worth it. (Hint, hint, IAC.)

Technology? Google's technology is good, but it's not magic. Some 23 year old will think of something much, much better within the next five years. That's almost a truism.

Consumer data? Well, maybe. But if that's the case, I predict government intervention sooner rather than later.

Lock-in? Placing an ad through a Google competitor is just not that big an increase in work. And, frankly, the last thing the ad agencies (who still place most media dollars) want is a single provider: it makes them superfluous.

Network effects? I don't see any, but maybe I'm being blind.

Falling long-run marginal cost through the output range? No. eBay has that, but not Google. Or, if it does, it's de minimis compared to the price.

I don't think Google has the characteristics of a monopoly. I think that no one has come up with a better product yet. That will happen soon, if history is any guide.

So, my prediction for the maximum rational Google stock price? No more than $1000 per share. (Note that I put "rational" in there to cover myself.) Of course I sold my just prior to Blodget calling for Amazon to go to $400 in 1998, based on similar logic. So, my recommendation: when Google gets over $1000 per share, move all your money into TIPS, the bubble has become unsustainable.

On a different note: I completely agree with Blodget that if you are putting your money into individual stocks (and you're not a professional stock analyst) then you are an idiot. Or sadly divorced from reality, whichever. I recommend Vanguard's and Fidelity's low management fee, broad-based index funds. The fact is, the people you are buying your Google stock from invariably know more about it than you do and they have decided to sell.

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