Friday, May 30, 2008

Google stock is worthless

The current price is $588.14/share, but the rational, fair-market value is $0. There are two ways of realizing value from a stock. One is for the company to pay out dividends out of its cash flow. The founders have explicitly said they never will do that.

The other way to convert a stock into money is for someone to buy the whole company in order to capture their cash flow. That won't happen with Google. Their current stock price translates to a market capitalization of $184 B. That's what it would cost at current prices to acquire all of the outstanding shares in the company. Nobody can buy Google. Even if GOOG went down to its IPO price of $85, it would still be worth $26 B. There have only been a handful of acquisitions at that level. Would you buy a Google hoping for a buyout, knowing that your share would have to lose 85% of its value for that to happen?

Even if that unlikely occurrence were to happen, it still has to go up against the founders, who have said they have no interest in selling out. Of course, shareholders have rights. When your management acts against the interest of the shareholders, you can overrule them. At least, that's what you can do in normal companies. Not with Google. Larry and Sergey each own about 10% of the company. Eric Schmidt owns another 3% or so. They own Class B shares, which each have 10 votes. Everyone else gets Class A shares, with 1 vote apiece. If you do the math, it turns out that those three guys have about three times as many votes as all the other shareholders put together. You read that right. So you can't overrule them. And you can't buy Class B shares, either, because they turn into 1-vote Class A shares when they're sold.

It's possible for them to change their minds, of course. Why would they, though? Larry and Sergey are each worth something like $18 B each. Even if Google loses 99% of its stock market value, they'd still be fantastically wealthy. It's hard to imagine anyone being able to offer them anything they can't already get. It's only if they lose interest that they might sell, but that doesn't help anything because the remaining founder would hold a dominant number of Class B shares. You'd have to wait for both of them to get bored. When would Larry and Sergey both lose interest in Google? Going by Bill Gates and Steve Jobs, it takes at least 30 years. That's a long time to wait for the possibility that Google will shift policy and pay a dividend or sell out.

To summarize, in other words: Larry, Sergey, and Eric won't give you anything, they won't let anyone else give you anything, and you can't make them, even if you buy up every single Class A share. It's like a piece of paper from a diploma mill.

So what are people paying for when they buy GOOG? As far as I can tell, they're all trading on the assumption that Google stock is worth something, but they haven't really thought about the implications of Google's ownership structure. It's a collective fiction. To be sure, so is the US dollar, but this is one of a whole different sort; people at least acknowledge that the dollar isn't real.

Above, I said there are two ways to realize value from a stock. I omitted one: someone else wants your share. That's the principle that there's always another sucker. It worked for a while in the late 1990s, but then the party ended. Do you want to be the one without a chair when the music stops?

Numbers supplied by Google Finance :-).

Note: this is a discussion just of the stock. The company is obviously very valuable.

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Blogger Rich said...

Totally agree. This type of thing will probably become more common too, until somebody abuses it and the market collectively realizes what you've stated. Then it will all come crashing down.

May 31, 2008 at 12:45 AM  

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