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Thursday, June 16, 2005

Hussman throws rocks at Google (GOOG)

Interesting Weekly Market Update from John Hussman, the founder of Hussman Funds (I'm assuming), regarding valuation and some specific comments regarding Google. It's actually a very intelligent discussion, so I recommend you read it if you get a chance.
The first paragraph discussion of "fair" and "over" valuation is very well put and I recommend any serious investor try to understand those concepts.
The second paragraph gets into a topic that I warned you would become very hotly debated for GOOG; namely, what will be the growth over the next few years? Is it 50%, 30%, 10%? No one knows, but this is where the market begins to gamble. I liken this situation to poker where you have to decide whether to call the pot with a 9-10 suited. If the pot is small, I like to make that bet because I have a chance to make a flush which is a great hand and a straight which is also a good hand. Both hands beat three of a kind but lose to a full house. So, at GOOG's IPO I felt like I was calling a very low pot ($85) to see the flop, and guess what? It came up Jack, Queen, Four -- same suit. So now I know I'm sitting on a flush, which is a very good hand and a likely winner, but the possibility remains that I may see a suited King or Eight somewhere on the turn or the river! A straight flush is a very rare bird indeed and you will win with that hand.
So, back to the original point of this post: Google's valuation. I think that there is an 8 or a King of my suit coming on the turn or the river. Why? Because I believe that Google is part of a new breed of Internet-enabled business models that combine Media and Business. This statement is very important because of the Media component. I believe that the media business is much different than normal consumer or widget businesses and is subject to different rules and strategies. Media businesses create defensible advantages by creating an emotional attachment to their consumer that continues to attract their attention over time. It's this attention that makes money. The fact that someone can create another search engine with different algorithms doesn't scare me because I believe that Google is creating attachments with consumers with their focus on giving users what they want (and doing no evil). It's clear that Google understands how to give people what they want when it comes to Internet products. Isn't Google Maps head and shoulders above MapQuest.com? The satellite thing? Freaking amazing! The interface? Much better and more usable than Yahoo! Maps. Gmail.com? Another great email program with much less clutter and more direct access than Yahoo! Mail (I have accounts with both). Google Answers? Basically a very simple Gurunet.com. I've used it and it actually works great. This understanding of the customer, this prescience, will result in Google doing what eBay has been doing for the last five years -- namely, continually outperforming expectations.
So, while Mr. Hussman can argue that the business model is indefensible and growth rates are not extrapolatable, I'm betting against him. I think the current consolidation in the stock is a great opportunity to build a position before the next earnings report.

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