Review & Outlook

Our take on the investing, financial, & economic themes of the day

Google’s IPO Ten Years On

20 August, 2014 by Matthew O'Brien, Ph.D. in Commentary

Yesterday was the tenth anniversary of Google’s initial public offering.  Google has flourished since then, its stock price up 1,304%.  If you had invested $10,000 at the initial offering, then you would have $139,458.82 today, which amounts to a 30.15% annualized return.  Not too shabby.  You would have performed even less shabbily if you’d picked one of the ten other companies that outperformed Google during this same period: Keurig Green Mountain (GMCR) up 7,729%, Monster Beverage (MNST) up 6,569%, Priceline Group (PCLN) up 6,277%, as well as Apple (AAPL), Alexion Pharmaceuticals (ALXN), Regeneron Pharmaceuticals (REGN), Netflix (NFLX), Intuitive Surgical (ISRG), Salesforce.com (CRM) and Western Digital (WDC).  (Hat tip: MoneyBeat)

google

The Journal’s Steven Russolillo points out that Google now trades at a price-to-earnings multiple that is much lower than it did in 2004.  Google’s current forward P/E is 20, while is initial forward P/E was 52, and surged as high as 65 shortly after its IPO.

These days, Google is neither cheap nor expensive compared to other big tech companies. Social-media giant Facebook Inc. sports a forward P/E ratio of 46 and Yahoo Inc. trades at a forward multiple of about  7, according to FactSet. Apple Inc. has a forward P/E of 16 and Microsoft Corp. trades at 16 times next year’s earnings.

The purple line shows Google’s P/E ratio and the blue line shows its stock price:

PE

Source: FactSet, WSJ MoneyBeat

At O’Brien Greene we generally avoid investing in IPOs.  Naturally, in hindsight I wish we’d made an exception to our policy with Google, which for the past several years has been a core technology holding for many of our clients.  Nevertheless, avoiding IPOs usually makes sense.  It’s difficult to value a private company before its offering, and it can be foolish to buy a company just when its insiders are selling out.  Writing in the Financial Times a few days ago, Meziane Lasfer, a finance professor at Cass Business School, London, notes, “Initial public offerings have long been, on average, underpriced on the first day as they tend to trade at higher prices than the offer price, and their long-run returns are negative.”  Google has proved to be an outlier, but this was contrary to informed expectations.

When Google was preparing to go public, the smart money wasn’t behind it.  On August 6, 2004 the New York Times ran a story, “Loving Google but Not its Public Offering,” which is fascinating to read now in retrospect:

In Silicon Valley, hackers, engineers, venture capitalists and sales executives love to use Google.

Just do not ask them to bet on it.

The valley’s digerati, traditionally among the biggest proponents of initial public offerings of technology stocks, are overwhelmingly bearish on Google’s widely anticipated offering, which is expected to get under way soon, through an online auction.

”I’m not buying,” said the Apple Computer co-founder Stephen Wozniak, who has been involved in several start-up efforts since leaving Apple in the early 1980’s. ”Past experience leaves the taste that a few people — never ourselves — will make out the first day, but that it’s not likely to appreciate a lot in the near future or maybe even the long future.”

Today analysts and investors regularly call for Microsoft to spin off or close down its loss-making search engine Bing.  Ten years ago, however, the Times picks it out as an emerging threat to Google.

….Google’s dazzling growth has lately shown signs of slowing. And the popularity of its search service has attracted a range of competitors, with others, including Microsoft, soon to follow….

Add that to a widespread perception among the valley’s best and brightest that Google’s trajectory has more than a passing resemblance to Netscape Communications, the company whose rapid rise and fall came to exemplify the boom-and-bust era of the late 1990’s in Silicon Valley.

No wonder a lot of the valley’s smart money seems to see Google stock as a sucker’s bet.

”I wouldn’t be buying Google stock, and I don’t know anyone who would,” said Jerry Kaplan, a longtime technologist. Mr. Kaplan made his name at the software company Lotus Development back in the 1980’s and has since been a Silicon Valley entrepreneur, taking two small companies public. Mr. Kaplan said he had warned his mother not to buy Google stock.

Hopefully Mrs. Kaplan didn’t follow her son’s advice.