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Photo by VSmithUKGoogle's common stock closed today at $259.56, down 64% from its all-time high in December, 2007.  It has underperformed the S&P 500, which is down a mere 50% in the same period.  But a company isn't cheap just because its stock price has dropped.  In order to figure out if this stock is really a good deal, I whipped out my trusty copy of Excel to crunch some numbers.  

Bear with me here, and I'll compare some Google valuation metrics today with the same metrics at the time of its IPO, and shortly thereafter partway into the big price run-up.  EBITDA is a (arguably the best) proxy for operating cashflow.  If you can't see the Google Docs spreadsheet below, you should look at this on my blog.

It's clear that Google is much cheaper than it was after its IPO by a number of metrics, which is good.  If you thought Google was overvalued at any point since it's been public, you have an excuse to re-evaluate.  But that still doesn't tell you if Google is a good buy or not.  To do that, we need to compare these metrics to some historical norms. 

For example:

• A couple years ago, the average EV/EBITDA multiple for an S&P 500 company was in the ~12-15x range (Google is cheaper at 7.3x)
• In the past half-century, the average Return on Equity for an S&P 500 company was in the 10-15% range (Google is generating better returns at 18.7%)
• Since 1935, the average P/E ratio for the S&P 500 is 15.6x (Google is cheaper at 12.5x)

So, why?  You would expect Google to be cheaper than the historical S&P 500 because either (1) the market expects Google's earnings to grow more slowly or (2) the market sees a lot of risk in Google's future earnings growth.  But the historical S&P 500 earnings+dividend growth has been in the range of 4-6%, while Google is expected to grow earnings at 15% and EBITDA at 20% next year!  You have to be really scared of a Google earnings collapse, and strongly disbelieve those estimates, to think Google should be cheaper than the historical S&P 500.

IN CONCLUSION:

If you think Google is a pretty average company that will keep growing its earnings in line with the S&P 500, it looks like an okay deal.  None of its metrics make it look extremely cheap.  Besides, there are other companies cheaper than Google today (the average P/E ratio of the S&P 500 today is about 10x).

If you think Google is a great company with a ton of smart people and a lot of growth still ahead of it, then it looks cheap as dirt.

The stock price might continue to drop in the short term, because stock prices often bear no relationship to the intrinsic value of a company.  But if I can scrounge some cash from the wreckage of my portfolio, I'm going to buy this growing cashflow machine.

Happy to discuss in the comments.

Hedge funds had another terrible month (Bloomberg article, h/t Naked Capitalism).  This is a bad time to be raising money for anything, but it's got to be an awful time to be raising a hedge fund (particularly if you need to be selling equity in the manager).

On the other hand, it's a great time to be lucky - if you happened to do well the last 3 months, your fund is probably getting overwhelmed with subscriptions!  I've heard anecdotally about a couple of small funds (< $50m) that have investors knocking their doors down for having 15%+ YTD returns.  I figure anyone who's up this year is either really, really, really smart (e.g. John Paulson) or plain reckless.

Paulson's busy buying mortgages like it's going out of style.  Maybe the Treasury should invest $50 billion of the TARP money with him and buy up distressed debt that way - I'd be much more confident of taxpayers getting a good price, even if we had to pay Paulson's fees.

The $1.65 trillion hedge fund industry is enduring its worst period in at least eight years as global declines in stocks and commodity prices led to investment losses and customers withdrew a net $62.7 billion from the funds last month, Singapore-based Eurekahedge reported. Assets may fall to about $1 trillion by the middle of next year, analysts at New York-based Citigroup Inc. estimated in a report published earlier this week.

``Hedge funds will probably face more redemptions for a while,'' said Akihiro Nishi, executive director at Tokyo-based Mitsubishi Asset Brains Co.'s investment advisory division.

The average hedge fund followed by Eurekahedge fell 4.5 percent last month, compared with the 19 percent drop in the MSCI World Index and the 22 percent slump in the Reuters Jefferies CRB Index, a benchmark for commodities.