Funny you should mention John Hussman. When I saw that GOOG was over 1000 today; I recalled an article he wrote back in 2005. "Which brings us to Google. Initially, I estimated Google to be worth about $24 a share. It has since enjoyed some very good operating surprises. I'd currently estimate its value somewhere in the $30's
No zero is missing in that last sentence, though the quickest way for the company to substantially enhance its intrinsic value would be to buy everything it possibly can with its own overvalued currency. Having made similar comments regarding the value of Cisco, Sun, EMC and Oracle near the peak of the tech bubble, with value estimates (which turned out to be slightly optimistic) at small fractions of their going prices, I'm pretty comfortable with that figure.
The difficulty with Google isn't in the product. It's neat. It's hip. I use it almost daily. The real question is this – why do we naturally assume that Google's revenues and earnings are going to grow exponentially from here? In a competitive market, with few barriers to entry and no particular brand loyalty, an advertising company that's valued at 1/5 the market cap of General Electric is not likely to mount a secure defense for its revenue stream. Unlike Microsoft, Adobe, or even Yahoo and Ebay, there's currently no benefit to users in aggregating around the same product as their “standard” (note to Google – this is really where you ought to be focusing your attention) and no high-cost obstacle to entry aside from smart statistical and computing algorithms. Therefore, there's no natural monopoly that would lead to a defensible competitive advantage. Sure, these guys are smart, and deliver useful, consumer oriented products. But when you value a company at 20 times revenues and over 100 times earnings, you're going to invite competition from some very, very intelligent people.
Given the company's business model, the long-term growth process is much more likely to represent a blend of logistic and extraction processes than the explosive exponential process that analysts seem to be taking for granted. And wow, will that make a difference over time.
My impression is that the explosive growth we've seen in Google's revenues recently has been very much a “simultaneous adoption” effect. With the enormous notoriety the company has enjoyed, it's natural that advertisers would want to try out that venue, and even pay a premium to do it. At present, however, the value of a click from Google is worth no more to an advertiser than a click from another source, so even if the value of Google's free product (search) is good, the value of their paid product (advertising clicks) is no higher than its competitors. And nobody, free or paid, has any inherent loyalty or reason to stay if another product emerges that is marginally better. This isn't the stuff that defensible profits are made of.
What investors seem to be doing is paying an awful, awful lot for future creativity. That might be reasonable, to at least some extent, if the company's dominant position in the industry had characteristics of a natural monopoly. But it doesn't. Usefulness of a product is insufficient for profitability unless it is coupled with scarcity. Why does Wall Street take it as given that the company will grow explosively into the indefinite future, much less maintain its profitability or market share over time?
To paraphrase Grantham, if Google is worth $300 a share, capitalism is broken." (Side note: GOOG market cap 336.82 billion; GE 260.20 billion) Stopped reading his Weekly Market Comment years ago.