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Thursday, February 28, 2013

Why does $GOOG have a PE near 25?

I can answer the question with solid arguments (ultimately I'm a Google bull), but I still do not understand why Google's size is getting a free pass.

1. Google has a market capitalization of $260 BILLION.

When Apple was a $260B market cap, it was growing earnings around a +85% rate, and its trailing multiple did not go above 25. In fact, it never saw a PE of 25 again. Despite a HUGE, absolutely huge, growth rate.

In fact, the only time I recall very large market cap. companies having such a high trailing multiple was during the tech bubble.

2. Google's core business, search, of which still earns Google +90% of its earnings, has peak market share. Desktop share has been hovering around 65-67% for a while now. Mobile share has been in the high 90% ever since Apple created the 'post-pc' world.

Google can not rely on outpacing the sector, when its market share has peaked.  It must rely on sector growth. Is the mobile Ad space going to grow at a rate justifying a high multiple for a very large company. (And while mobile will grow, it will disrupt desktop. So there will be a push-pull growth relationship it will have to combat.)

3. Google's new line of businesses. Hardware. Looks like Google want to get into the premium hardware space with Google Glasses and Chrome Pixel. And if that is the case, then a shift to self branding of their Nexus devices is on the way.

Would the expected growth from hardware driving higher street expectations, allowing for a high multiple for such a large company? The very fickle business line that causes a constant poo-pooing of Apple from the hardcore droid-boys or Apple-bears. 

So, how is the 3rd largest US corporation going to justify a trailing multiple near 25? (P.S. none of the largest 20 US corporations have a trailing multiple greater that 20.)

I simply do not know.

From the looks of how Google is transitioning, Google is building a consumer hardware business from its web-services. Seemingly copying Apple along the way. As if they want to be viewed as the "new Apple".  The only problem, Apple is Apple.

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