We’ll Know the Web 2.0 Bubble Has Burst When Google’s Stock Crashes

Scripting News: 11/28/2006 Dave Winer has an interesting observation out today about the Web 2.0 bubble. Since most of the Web 2.0 companies are not going public, the question Dave raises is how will we know when the bubble bursts. Dave suggests that we’ll know when Google’s stock crashes.

Since most Web 2.0 companies are not selling stock to the public, and are mostly funded by VC money, the argument would be that we would not likely see a dramatic fall out like we did with the tech stock market in 2000-2002.

But Dave thinks that Google has a big impact on the health of the Web 2.0 playground and that as go Google’s prospects, so goes Web 2.0.

And this might be true to the extent that so many Web 2.0 companies business plans are built on eyeballs and advertising. But there are some that are generating real revenue and real profits and these might be the ones that survive even if we do see a Google induced Web 2.0 crash.

With Google’s current P/E ratio sitting at about 60 times earnings it does make you wonder. Is Google’s stock price already set for perfection? What if advertising revenues don’t come in in line? What if there are cracks beneath the surface of Google that we don’t know about?

Earlier today, on his Real Money Radio Show, Jim Cramer was lathering Google up good, like only he knows how. He was praising the pathetic Verizon deal (there is no way people are going to pay $15 per month for YouTube on their phone) and telling viewers that they need to buy Google now. This kind of stuff worries me. Kramer is pure hype. And hype builds speculation which builds panic which builds crashes.

Of all of the stocks in the Standard & Poor’s 500 Google has the 11th highest overall analyst rating out there. Wall Street could not be more bullish on the stock. Buy, buy, buy, buy. But there is very little room for more enthusiasm left on the stock. A single solitary analyst, Philip J. Remek over at Guzman & Co. (an investment company that no one has heard of of course), is the only analyst on Wall Street saying sell. And even there Guzman’s target price for the stock is $460 a share, a mild drop from where it sits today. Contrast that with Safa Rashtchy over at Piper Jaffray who says that Google is going to go to $600 a share or with Mark Rowen over at Prudential who says that Google is going to go to $575 a share and you really do have a stock priced for perfection.

Personally I’m scared of Google’s stock price. I don’t own any of the stock myself and worry that it could be set for a fall. And if it falls I worry that Dave might be right and that the collateral damage that impacts the entire Web 2.0 could hurt a lot of great companies and businesses.

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  1. Anonymous says:

    Dave Winer here…

    Companies whose business is not based on Google, or Google-like ad revenue, should identify themselves now as clearly as they possibly can as NOT being Web 2.0 companies.

    The price for not being clear in this positioning could be really high.

  2. Anonymous says:

    I’m afraid I don’t follow the Winerian logic here. Who cares if Google’s stock falls? Is the argument that if companies stop buying AdWords ads, and Google’s stock falls *because of that*, then it will be bad for other companies? But even here, what does Google’s stock have to do with it? If there are no AdWords advertisers, AdSense revenues will go down, and that will be bad for all these Web 2.0 companies, *whether or not Google’s stock falls*.

  3. Anonymous says:

    Why nobody take in account that USD can fall too ? It’s also overpriced, with high losses and other issues like Iraq.

    In this light it’s better to sell your USD by taking GOOG.

    One more – Google more and more make money from their own websites. What does it mean – it does not rely that much on those Web 2.0 companies. BTW, Slashdot and sourceforge.net is one of those – VA Linux make most of money from Ads – not Linux sales 😉

  4. Anonymous says:

    Cramer is hype but you’re not? You’re suddenly and expert at valuing stocks? Ya whatever.

  5. Josh says:

    The $15 for Verizon isn’t just for YouTube. That includes other apps as well.

  6. Anonymous says:

    If Google believed in stock splits the current price would reflect a 2:1 and a 3:2 stock split. Not much for an industry standard-bearer. Google is fairly priced. Barring an overall market drop, it won’t decline much. Sorry.

  7. Henry Tam says:

    All you really mentioned was the google stock price. You can’t say a company is expensive by just looking at the stock price. Just because GOOG is over 400 doesn’t mean it’s overvalued. For some reason, people freeze when an internet company’s stock price is over $100. Don’t let the price fool you. Just think of it as a $4.8 stock.

  8. Thomas Hawk says:

    Henry, If Google split there stock right now it would likely only exacerbate the problem. It is good that it costs $484 a share right now because it makes people think twice. It’s all smoke and mirrors as 100 shares at $48.40 is no different than 10 shares at $484, but it’s enough to scare some people away.

    There are reasons that Warren Buffet doesn’t believe in stock splits. One of the reasons is that by forcing investors to commit more serious investment capital to a stock you get less amateurs and more committed investors buying the stock for the right reasons.

    I’m glad that Google is not splitting their stock given the frenzy and optimism that seems to be surrounding the stock for the time being.

    Think back to 2000 when very briefly Cisco Systems became the largest company in the world based on market cap. They passed Microsoft, they passed WalMart, they passed Exxon, on March 27th, 2000 Cisco stock was the largest company in the world with their stock trading at over $80 a share that day. Today it trades at $27 a share and that’s with it being up almost 40% in the past two years. It’s still well off the $80 high.

    On March 27th, 2000 Cisco was trading with a P/E of 192 and nobody cared.

    Google’s P/E right now is at almost 60. Take the super bullish analyst expections for next year and you can bring that down a bit *if* they fully meet very bullish expectations.

    The average stock in the S&P; 500 right now trades at about 17.5 times earnings. Microsoft trades at a little over 22 times earnings.

    All I’m saying is that Google is indeed priced for perfection with very bullish Wall Street sentiment, lots of hype and possibly people confusing a great company with a great investment opportunity.

    I hope I’m wrong and that Google keeps going up forever and ever.

    This is not about stock splits, it’s about a company that must bat 1,000 for the foreseable future. Anytime you have speculative frenzy it worries me. Google worries me. And it worries me that other companies might get carried away with a possible crash in the stock.

    I worry about irrational speculation on the part of investors who don’t even know what a P/E ratio is. I worry about the average investor watching Jim Cramer hype the stock and then going online at Charles Schwab and pushing as Cramer would put it, “buy, buy, buy, buy, buy, buy, buy, buy, buy, buyyyyyy, BUY!!!!!”

  9. Anonymous says:

    You cannot compare S&P; 500’s P/E that to Google’s. Those companies dont have that kind of growth, to match their P/E to Google’s.

    Also, discrediting Jim Cramer as “pure hype” is kinda childish on ur part, he has a track record and experience in this business to match his claims and expectations, granted he is not right *all* the time, no one is, even Warren Buffet is wrong sometimes.

  10. Anonymous says:

    Who said the USD is overpriced? Have you actually compared it during the last 15 months against, say, the euro?

  11. Anonymous says:

    Just be clear – I’m NOT Warren Buffet to make predictions like this – but even he bet against USD in long-run and already made $2 billions from this.

    Instead of EUR – pick China Yuan. China has stopped fixed exchange rate and started long-long dive meaning it will cost USA (and Wallmart) more and more to buy products from China.

    BTW, Regarding GOOG – everybody in USA own part of it. They do this indirectly via their 401(k) savings.
    Mutual funds already own 30% of GOOG.

  12. Anonymous says:

    Thomas, you are making some dangerous comparisons on PE Ratio here. Google is still a newer Tech company and is going to have a different PE ratio than a company like Microsoft, or even the S&P; 500. That’s not necessarily a bad thing.

    The fundamentals appear to be there with Google. A lot of this other stuff you are talking about fuels the hype and speculation.

  13. You know, I can’t help thinking that the bubble bursting will come about when people quite simply become sick and tired of bit-part services that should already be parts of the social media services like myspace and facebook anyway.

    With so many Web 2.0 “businesses” creating micro-services that ensure our attention is split in 20-different directions there will inevitably be a point where people will simply fade away – and bang go the advertising revenues.

    If “Web 3.0” isn’t about the consolidation of social services then where else is there to go?

  14. Anonymous says:

    Dave Winer here…

    Companies whose business is not based on Google, or Google-like ad revenue, should identify themselves now as clearly as they possibly can as NOT being Web 2.0 companies.

    The price for not being clear in this positioning could be really high.

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