Google Gets It

There’s a great deal of talk these days about a lack of trends and market leadership.  Most recently, homebuilding and real estate have driven the market, along with energy.  With interest rates rising and energy prices declining, the likelihood of these industries continuing their out-performance near-term is doubtful.  Additional leadership has come from investment banks and brokers as their earnings have increased on the rise of mergers and acquisitions.  But this activity is a bi-product of excessive capital and compelling market values.  Better allocation of capital and increased productivity will improve profits to a degree, but it will not significantly drive GDP.  Where’s the next big wave of real growth coming from?

           in a word.  We live in a world that is increasingly smaller and more competitive.  Communication and information technology are changing the frontiers of business and lifestyles almost daily.  In order to improve profits, companies are compelled to innovate faster, produce and distribute their product more efficiently, and market more creatively than their increasing number of global competitors.  They will seek every edge they can get, and the primary sources are as they have always been – technology and communication.

But this should not come as news.  In the late 90’s communication and technology were practically worshipped as the next big revolution to follow the Industrial Revolution.  The dream soon outran reality and stock prices soared well into the stratosphere for anything tech, dot com, or communication.  A good proxy of the run-up to and subsequent decline after the bubble is provided by Cisco.  Over 75% of the Internet is powered by Cisco routers and switches.  You can see the steady rise in Cisco’s stock as the Internet and the World Wide Web grew in popularity and use until mid 2000 when the technology world came crashing to earth.  Cisco’s stock price still remains 80% below its peak, while earnings have more than doubled since mid 2000, representing a 17% annual compounding of earnings.

Even though earnings have been good, what’s collapsed has been the ratio of the stock price relative to the company’s earnings, or it’s P/E.  The P/E is an indication of investors’ confidence in a company’s earnings growth rate in the future.  Cisco’s P/E was as high as 218 in 2000; it is now 16.5.  That’s a huge drop in confidence.  Is it warranted?

Google is leading the way in a resurgence of confidence in the communication and technology arena.  Their advertising revenues are soaring while those of traditional media are falling.  The innovators at Google are exploring as many business opportunities as their imagination and capital will allow.  Hardly any business feels immune to their threat.  Their direct competitors seem more active than ever.  Yahoo, MSN, and AOL are busy with numerous initiatives of their own.  The upside of all this innovation is a continually changing business landscape, not only for them, but for all business.  Global communication will become increasingly available through an ever-increasing number of devices and platforms.  Both large and small business will benefit hugely from the trend.

The Technology Revolution is not over by a long shot and never was in jeopardy.  Many of the stocks of yesterday’s leaders remain shadows of themselves price-wise, but today they wield considerably more financial muscle and substance than they did then.  If we believe that the Information Revolution is alive and well and that demand from the world’s business for competitive edge through improved technology and communications will continue, then the companies that supply it now and in the future appear to be trading at bargain prices.  To find out how much longer this condition will exist, why don’t we ask Google?