GOOG insiders dumping shares
Wall Street Journal - December 31, 2005
COMMENT FROM breakingviews
Indicators From Internet-Firm Insiders As Large Web Companies See Stock Valuations Soar, Their Leaders Are Selling
Investors sure expect a lot of growth from the Big Four of the Internet: Google, Yahoo, eBay and Amazon.com. Do a bit of math, and you can figure out just how much. EBay is the least expensive, at 44 times expected 2006 earnings. The U.S. market trades at about 17 times next year’s expected earnings. To justify such a premium rating, the online auctioneer must increase annual profits about 20% faster than the market for the next five years. This looks difficult but not impossible.
And that is the point. Uncertainty makes guessing the worth of an Internet stock a mug’s game. Their valuations are linked to what Defense Secretary Donald Rumsfeld would call “unknown unknowns.” Services such as Internet telephony, television or something not yet invented could be worth billions to a company like Yahoo. Then again, a new company or technological change could hammer any of their core businesses, as Microsoft’s Explorer browser did to Netscape less than a decade ago.
That is why it is perhaps more instructive to watch what insiders do. And they’re taking cash off the table at all four companies. None have sold more than at Google, which has also been the best at attacking new market opportunities. Moreover, it recently agreed to pay $1 billion of its cash for a 5% stake in AOL. Now instead of thinking what the agreement says about AOL’s valuation, reverse it and consider what it means for Google’s.
Through a business partnership in place before the deal, AOL provides as much as 5% of Google’s earnings before interest, taxes, depreciation and amortization (Ebitda) — roughly $125 million in 2005, according to analysts’ estimates. On that basis, Google could be said to be paying eight times ebitda to secure its own profits. Google is valued by the market at 47 times ebitda. Sure, the comparisons aren’t exact. But they may illustrate the difference between the public market’s lofty expectations for the future and what insiders believe is possible.