Tuesday, October 02, 2007

Meet Me Here in Ten Years' Time: BHP Billiton vs. Google

2 October 2007

One of my mentors and financial guides,
Bill Fleckenstein, commented today on the utter mindlessness in today's stock market.

Mr. Fleckenstein stated the following: "I was quite struck by the number of e-mails I received yesterday from thoughtful people I know who feel like we're in an environment that no one has ever seen, in which thinking is totally useless. While that does seem to be an accurate assessment, it occurs to me that market action this seemingly mindless can only occur once you're near the end of whatever the process is that's under way."

In particular, he cited the soaring market capitalization of
Google, which I'll grant you is a great company (and also my sponsor without charge at this site), but whose income is entirely dependent upon a somewhat fragile and obviously market-sensitive base of paid internet advertising.

Google as a company seems also to be trying to do almost everything at once. The managerial boundaries and cost controls do not appear to be totally clear. Certainly there is risk here, particulalry when one considers that revenues are not profits. In fact, considerable discipline is required to generate profits from revenues, and Google has yet to prove that it can accomplish this mission.

I read only last week that Google has now approached the market capitalization of
BHP Billion, the largest integrated mining company on the planet – a massive global company brimming with real, irreplaceable and increasingly valuable material, technological and human assets.

In recognition of the current "mindlessness," I'd like to propose an exercise regarding Google's stock price.

Presently, Google (stock symbol: GOOG), today’s most successful internet services company if you will, is approximately equal in value to BHP Billiton (stock symbol: BHP), our globe’s largest mining company, and one that has been tried and tested through decades of often harsh experience.

According to Forbes Magazine, in March 2007, Google had a price to earnings ratio of about 45:1. By way of contrast, BHP had a price to earnings ratio of about 12:1.

Let me propose - as a thought experiment for the presently unthinking – that in 10 years' time, Google could well have declined in market capitalization by a factor of 10 (at $18 billion, it would still be worth more than most of today’s mining companies).

Contrariwise, BHP's market capitalization could increase by a factor of 10 (possibly becoming the world’s first, or one of the world’s first, trillion dollar companies).

Thus, the relationship between today's two virtually equivalent companies could be one in which BHP is of greater value than GOOG by a factor of 100:1.

The name "Google" is based on "googol," a very large number, conssiting of "1" followed by 100 zeroes. 100:1 is hardly a googol, but it is certainly pointing in that direction....

Just to stimulate thinking during an era of supposed thoughtlessness....

Today’s values:

stock price $79.80 / market capitalization $229.74 B / Annual revenues of $32 billion/year / #205, Fortune Global 500

stock price $584.39 / market capitalization $182.41 B / Annual revenues approaching $15 billion/year / Not yet on Fortune Global 500

I'll meet you here on October 2, 2017, and we'll have a look at the market capitalizations of what are today two of the most valuable companies on the planet. Let’s see how this thought experiment plays out….

All posts on this topic:

Revisiting BHP and Google at Year Four

An Early Update on Google versus BHP

Google versus BHP Billiton - Part II

Meet Me Here in Ten Years' Time: BHP Billiton vs. Google

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