Google (GOOG) vs CBS Corporation (CBS)

By: ispeculatornew
Date posted: 04.06.2011 (5:00 am) | Write a Comment  (3 Comments)

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Last week I read a very interesting piece on the Wall Street Journal website about Google’s (GOOG) valuation as the author took an interesting argument. That Google should not be considered as a technology company but rather as a media company. Why? One of the main arguments were that Google’s revenues are almost only driven by advertising, like most media companies. I would not agree with this conclusion but let’s assume that the author is right. When doing that, author Martin Peers argues that Google is very very cheap. Why? It is trading at a 15.5 P/E ratio while CBS trades at 16.8, with Walt Disney at 16.4 and News Corp at 15.8. It’s an interesting line of thought and from that point of view, I can see how he would conclude that Google is cheap.

If Google is a media company… its valuation makes no sense…

How could Google trade at a cheaper valuation than those companies? It makes no sense. Google is the leader in  a market (search advertising) that is not growing as quickly as it used to but still remains well above double digit growth. Let’s not kid ourselves….. no “traditional media” industry (tv, newspapers, magazines, etc) is growing even close to that pace. Add to that other opportunities that Google has in display advertising, through Android, and other such ventures and it’s difficult to imagine how even 5 or 10 years from now, Google could slow down to the point where its revenues from would grow at the pace of these other media companies….

But Google is a technology stock

The major problem I have with this whole article/opinion is that I do consider that Google should without any doubts be considered as a tech company. There are many differences between the two and while some tech companies such as Yahoo try to act as “double agents” in both sectors, the industries are very different in reality.

One of the maing things for me is that technology companies can become obsolete very quickly. Google faces a lot of competition and faces a much bigger threat than traditional companies. How? Which of these two scenarios is more likely in your opinion:

-A company like Walt Disney or CBS sees its shows drop market share (and thus advertising) by 30-40% within 30-40 years as the quality of the product diminishes or new competitors emerge
-Google sees its search market share drop by 30-40% because Facebook, Twitter or Microsoft’s Bing improve to the point where they become viable alternatives when searching the web.

I would argue that for CBS or Walt Disney to drop this much is nearly impossible while Google’s fall is unlikely but certainly possible. That is a huge difference and it is caused by the competitive barriers to enter traditional media compared to the ever changing technology sector. Just remember how dominant MySpace was just a few years ago.

So no, I don’t think Google should be considered a “media company”…

That being said

I think that while Google should not be considered “media”, media companies do face almost as much risk these days. Companies like News Corp are facing a lot of pressure from the “new media” companies such as the Huffington Post and I think the valuations of the two will converge over time as media becomes as much about content as it is about technology and distribution. Things are changing fast.

In conclusion, while I personally love Google and think the company is a great buy at its current price, it’s difficult for me to justify why ity should or would be priced as a media company, it just does not make enough sense to me. Do you agree?

Disclosure: Long Google (GOOG) & No position on CBS (CBS)

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3 Comments

  1. Comment by noah — April 6, 2011 @ 1:21 pm

    yes, totally agree here. i think goog is excellent long term investment.

    i never expected goog to be trading at this low mult. however, as it grows it will be harder to increase its revenue without say buying other companies. However, i think Goog has ample opportunities in front of it.

    Just one example, say goog were to expand more into say TV advertising by acting as middle man for the exchange platform of biddable tv ads. They already do this but think if they broke into a much larger market of this.

    For example, by working with Comcast + Direct TV to drop pixels through Ads and link these back to the user (most users who watch TV also buy products on their computers), this would allow a small percentage of user sales that resulted from TV ads to be measured. Then Goog could take a percentage for managing the technology of this bidding exchange.

    However, unless Goog can expand business model to other revenue channels the growth rate is sure to slow in the future … but online ad revenue is not gonna drop off… it will continue to grow but at a reduced rate.

    One prob Goog will have is also in acquisitions. Goog should only retain the money if they can deploy this capital at attractive rates, as buffet would say.

    to really increase its market cap in the coming years it seems will take buying other companies (which maybe is difficult to find good opportunities) or by buying other companies or doing something new to grow revenue much. Still, even if they continue at the current rate i see the stock going to 700 within 6 mths to 1 yr.

    finally, i agree u cannot value as media company for another reason … when someone writes for a paper they spend time on an article, but at the end of the day the final article will have no future value (like you don’t publish the article continuously in the future).

    Google on the other hand has all these people working on projects (their 20% time allocation), and I believe software projects do have considerable future value.

    What I think of is how software design is a bit different than writing a paper because the framework/tools these people build is re-usable in the future (unlike the news article).

    So, with that in mind I would think you should value some software development in terms of its replacement cost. So, to understand that, ask yourself, what is the replacement cost of building Goog’s framework, tools, and distributed technologies?

    The replacement cost would be that of hiring all those software engineers for many years to build these technologies.

    So, compared to the news paper writer, the work google puts into software design, because of reusability, I believe should partially add to increases in an intangible entry on the balance sheet. But there is no such entry, which I believe makes Google undervalued. I’m not saying the intangible value should grow each quarter at the rate of every dollar they paid to programmers (a lot of these technologies will be divested in the future). However, if you imagine say “Google Docs” is created on one particular quarter, it has some intangible asset value but one that is not on the balance sheet.

  2. Comment by Andrew — April 6, 2011 @ 2:08 pm

    Who cares what the company is classified as? The stock is unbelievably undervalued and I think the FTC is full of crap if they believe that Google is a monopoly that should be investigated. Google has simply out innovated Yahoo, Bing and others making it synonymous with internet search. It provides practically all of its services free, so it should have control over its advertising revenue. If Microsoft is complaining to governments about Google, why doesn’t it provide better products instead of trying to sue because Microsoft is a tech dinosaur with no new interesting products on tap…

  3. Comment by IS — April 9, 2011 @ 5:28 am

    @noah – Love the analogy of “reusing” content, I wish I would have thought about it when writing the post. Very good and extremely well explained, thanks for the comment:)

    @Andrew – actually, a big part of what determines the P/E remains the company’s classification and thus its “peers”…I do see your point but think it does matter to an extent.

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