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Google's IPO: A Sobering Peek into the Future

Strategic Insights

— 2 min read

As Google prepares to go public, Steven A. Ballmer, CEO of Microsoft, has sent a clear message to the executives at Google: the inflated expectations of Wall Street can be a burden, not a blessing. Google, expected to be worth $29 billion to $36 billion, has set the stage for a potentially disastrous IPO. Analysts warn that the company's valuation is based more on hype than business fundamentals.

Key Takeaways:

  • Google's expected market value is higher than that of Ford Motor, Starbucks, Federal Express, and Lockheed Martin, despite generating a small fraction of their revenues.
  • David Menlow, president of the IPO Financial Network, advises against investing in Google, calling it a "financial train wreck."
  • Michael Moe, CEO of ThinkEquity Partners, compares investing in Google to making a bet on a thoroughbred, implying a high-risk, high-reward gamble.
  • Over 5,000 companies went public between 1989 and 2000, with nearly one-third declining by 50% or more since their IPO.
  • In 2004, two dozen technology companies went public, collectively declining by 10% as of Friday's stock market close.
  • Analysts estimate that Google's shares will sell for $108 to $135 each, making the company worth 150 times its last four quarters of earnings.
  • Google's gross profit margin is in the high 80% range, compared to the average tech stock's 40% margin.
  • Competitors, such as Yahoo and Microsoft, threaten Google's dominance in search, and the company must increase traffic on its site to justify its valuation.
  • Ashok Kumar, a technology analyst at Raymond James & Company, believes Google's pricing "harkens back to the late 90's boom" and is based more on hype than business fundamentals.

Statistics:

  • Google's expected market value: $29 billion to $36 billion
  • Google's estimated share price: $108 to $135 each
  • Google's valuation multiple: 150 times its last four quarters of earnings
  • Average tech stock's gross profit margin: 40%
  • Google's gross profit margin: high 80% range
  • Number of technology companies that went public between 1989 and 2000: 5,000
  • Number of technology companies that declined by 50% or more since their IPO: 15% (nearly one-third of those listed)
  • Collective decline of 2004's technology IPOs: 10% as of Friday's stock market close
  • Time since last technology bubble: approximately 4 years (since March 2000)

Sources:

  • Ballmer, S. A. (2004). Annual email message to Microsoft executives.
  • Google. (2004). SEC filing.
  • Peterson, R. J. (2004). Chief market strategist for Thomson First Call.
  • Menlow, D. (2004). President of the IPO Financial Network.
  • Moe, M. (2004). CEO of ThinkEquity Partners.
  • Kumar, A. (2004). Technology analyst at Raymond James & Company.
  • Slome, W. (2004). Co-manager of the American Century Ultra Fund.
  • Thomson Financial; Bloomberg Financial Markets. (2004). Chart: "Win Some, Lose Some"

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