Google Sets IPO Pricing

It appears that Google has set their IPO price - 108$ - 135$ per share. Yowza. A reminder that this is done through the Dutch Auction ^? process, which makes that pricing even more...uh...interesting.

Probably worth it though....

Wow, this kinda reminds me of the Palm IPO pricing bit, where when I found out about the price per share, I lost complete interest in purchasing any and told my broker to not purchase. (boy am I glad about that). However, this is a different matter in that the search engine is in just the beginning of its time here while the Palm IPO was what.....8 years after the Newton was released? Also, even though I am a fan of the Palm Pilot, Palm has had no real innovation going on for quite a while (it would be nice if Apple had released their PDA to force folks to innovate a little more). While Google on the other hand is still running their company like they are actually interested in innovating and are forcing a number of fairly sizable companies to innovate to keep up which is always good for the consumer. This is a company that I will be interested in investing in even at $108-$135/share.

Re:Probably worth it though....

"However, this is a different matter in that the search engine is in just the beginning of its time here while the Palm IPO was what.....8 years after the Newton was released?" I don't know about you, but I remember using search engines in '94, that was 10 years ago.

Re:Probably worth it though....

All web searches have good top 10 result responses for years.

What would you consider a slow web search engine?

This... [fury.com]

Re:Probably worth it though....

Step 1 hasn't changed in a long time. [...]
Not much innovation recently.

I think that's a plus, not a minus. That's like saying the telephone hasn't seen much innovation because we're still just putting our mouth to a hole and talking.

Caching a copy of the web was certainly innovative. Google's news search was innovative. Their AdWords program broke new ground. They've also continued to add a variety of special features [google.com], including special functionality for addresses, phone numbers, calculations, hot news topics, and package tracking numbers. And although you can't see it, their behind-the-scenes operations are very innovative.

And really, I think keeping Google's simple interface has been one of their biggest innovations. For years, everybody thought thing thing to do was to clutter up your main pages with boatloads of crap. Google's relentless focus on what their users want, rather than what their MBAs think is the best way to squeeze revenue from their users, was a huge gamble that has paid off beautifully.

Re:Probably worth it though....

I find it difficult to believe that this stock price can be maintained... It puts Google as about 60% of the value of the US auto/truck industry (GM + Ford), or about the value of Boeing.

The only people making $$ on this are those in the middle, or those starting out with Google shares.

Re:Probably worth it though....

Not that simple. Also depends on how many shares they sell. I seem to remember some high-faluting company that has $10,000 per share prices... but there are only a few thousand shares of stock issued.

Would it make you feel better if they issued stock at $20 per share, but put 5 or 6 times as many into circulation?

Re:Probably worth it though....

Berkshire-Hathaway's A stock [yahoo.com] was worth just over $88,000 per share this morning. Their B stock [yahoo.com] is almost $3,000.

You mean Market Cap

I find it difficult to believe that this stock price can be maintained

You mean the market capital of Google wont be able to maintain that price right? The Market Cap = the Stock Price * the Number of shares; therefore, the stock price alone dosn't mean reflect the value of the company.

According to the article; Which you're correct the market cap of BA is 39.80B and Google wont be able to keep that for long.:
WASHINGTON (Reuters) - Google Inc., the world's No. 1 Web search provider, said on Monday it hoped to raise as much as $2 billion in its highly anticipated initial public offering and could have an initial market cap as high as $36.25 billion. About 24.6 million shares will be sold in the IPO for between $108 and $135, according to an amended prospectus filed with the U.S. Securities and Exchange Commission (news - web sites).

Re:You mean Market Cap

Hrm. If you sell 24.6M shares at $135, and only raise $2B, where the heck did the other $1.3 B go? (24.6M x $135 = $3.3 B - and I know they're not paying 30% to the underwriters!)

Also, how can the market cap be $36.25B when 24.6M x $135 = $3.3B? For the market cap to be $36.25B at 24.6 M shares, the share price needs to be $1473.58. If the share price is $135, that means there are really 268.5M shares and less than 10% were made public.

Perhaps there was a misplaced decimal point in that $36.25B number?

Re:You mean Market Cap

Your last point is correct, companies almost never sell all their shares to the public (some trusts sell all shares in an effort to buy a large asset). Google's founders, employees, and venture capitalists will be holding about 90% of Google's shares. The $2 billion likely uses the $108 price, rounds down, and subtracts the underwriter's fees (usually 6%-7% in Google's case rumored to be 3%-4%). You would have to check the filing but I think Google currently has about 260 million shares outstanding (Pre IPO).
One of the reasons tech companies get tremendous valuations is that they have very limited floats (total number of shares less number of shares off the market in the hands of insiders and other large shareholders). As a result the price is set on only a small portion of the total shares. I'm surprised they don't split 3-1 and bring the per share price out of the stratosphere given their stated focus on idividuals (fund's prefer high share prices, retail investors prefer lower share prices).

Re:You mean Market Cap

You're also forgetting that they have outstanding stock that investors and employees hold, which become part of the market cap when the IPO is complete, IIRC.

They plan to open up 24.6M shares at $108-135, but employees and investors also hold stock.

Re:You mean Market Cap

The strategy is to keep people from buying stocks at $10 a share until after the rich folks have capitalized on the 1st round at $130 a share. Afterwards, there has to be a split which will send a frenzy to buy the stocks again by the common joe. Followed by a complete burnout. Then it'll go back up and cycle continues.

Trust me, I have owned multiple pre-IPO stocks to know the experience. Rich folks will profit 2 or 3x before the regular folks even get their hands on it. No, I am not some harvard junkie regurgitating garbage from the wallstreet journals.

Re:Probably worth it though....

I've always been fascinated by people's fixation on the share price when it means absolutely NOTHING in the grand scheme of things.

A stock's value is calculated by the share price times the total number of shares outstanding. Now, Hemos was quick to comment on the share price, but lacks the understanding to figure out just how much cash the company is raising and what the total value of the company will be at these levels.

But who cares?

It really doesn't matter because the average investor doesn't know any better. This is the same reason that stocks go up when the company announces a stock split [sec.gov]. The idiots eat these stocks up because they think that there's something magical about owning a stock through the split. "The company gives you more shares", responded an ignorant investor after I queried him on his voracious appetite for buying companies that are ripe for splitting. What he failed to realize is that the price drops proportionally - the value of the company (and each investor's holdings) is the same before and after the split. But nevertheless, owning these companies through the split is often a very profitable [stocksplits.net] method of investing simply because of all the ignorance out there. Never underestimate the power of stupid people in large quantities.

It makes me want to shoot myself in the face.

Meaningless Valuation

I'm sorry, were you talking about people's fixation on stock price, horsepower, or MHz? :-)

The world is filled with meaningless measurements that are usually pushed by those that benefit from everyone else's ignorance.

Sad, but true.

Re:Probably worth it though....

The idiots eat these stocks up because they think that there's something magical about owning a stock through the split. It makes me want to shoot myself in the face.

It may be stupid, but play it. Then you can shoot yourself in the face while relaxing on your 50 ft yaht. The market is mostly psychology.

Re:Probably worth it though....

Ok, I haven't seen anything so far on this:

To determine if a stock is "high priced" or not, you don't look at the price of the stock. You look at other things, notably the price to earnings ratio (P/E). If you look at $135/share, that's a steal compared to other tech stocks. If there are only 24.6M shares (which there are actually more), going by the latest quarter where Google earned $79.1M, that's an earnings per share (EPS) of ~$3.21. Assuming that's an average for 4 quarters, that's a P/E of only about 10 ($12.84/$135 = 10.5)! Most tech stocks are trading around a P/E of 30, some even up in the stratosphere of 50+ (in the dot-com boom they were around 90+). More total shares means a P/E that's even lower since EPS.

Basic stock market concepts here boys... you buy based on P/E ratio, not "sticker price" of a stock. The reason? Even though it's completely made up, you expect that if earnings goes up 10%, the price of a stock will go up by 10% * P/E. The P/E ratio is like a "magnifier" on the earnings growth, and it's why people like stocks with high P/E - but not too high because that can indicate a bubble. Basically you look at P/E relative to competitors, and no matter how you cut it Google's P/E looks like bargain-basement pricing to me at $130/share. Heck, it's a relative bargain at even $300/share by those measures... (P/E somewhere around 30).

For comparison, the P/E of M$ is 42, Apple is 54, Amazon is 107, Yahoo! is 107... so Google is indeed a bargain.

Re:Probably worth it though....

I agree with you that looking at the raw price per share is a silly way to value a stock. If Google had only ten shares, and somebody offered to sell me one for $50k, that'd be a hell of a deal. If they had 10 billion shares, then it would be a bit less attractive.

That being said, your math is wrong. Google and its owners (the founders, the VCs, Time Warner, etc.) are selling 24.6 million shares to the public. Once the IPO is done, they'll have 268.5 million shares outstanding, so they're selling a bit less than 10% of the company into the market. With 268.5 million shares outstanding, and quarterly earnings of $79.1 million, annualized to $316.4 million, they're delivering annual earnings per share of $1.18. That's a P/E of 91.5 to 114, depending on the IPO price. While Google's a great company, that's a damn pricey valuation.

Also, remember that the Class A shares they're selling are really second-class shares. The founders have issued themselves special Class B shares that guarantee them voting control, even if they own a very small % of the overall equity of the company.

Web index as revenue generator

I think it's a fair price. It reflects the money Google will make in future from selling access to their web index and associated technology [google.com] - a market that they haven't even begun to seriously develop. The Internet is going to be around for ever, and its content is going to keep growing exponentially until this scary vision [bizreport.com] is fulfilled. Google's search results represent (to date) the best attempt to organize this information in an intuitive user-centric way.

In fact, they already provide programmatic access to their results via the Web APIs [google.com], spawning services ranging from a recipe generator [researchbuzz.org] to a site for detecting online plagiarism [copyscape.com]. According to this story [theregister.co.uk], the developers of Google Alert [googlealert.com], one well-known APIs application, have recently been granted permission to commercialize their service. My guess is that it won't be long before there are many more 3rd party Google applications, bringing in a lot of new money to Google's coffers. Anyone for a BUY rating?

Re:Web index as revenue generator

"I think it's a fair price."

Any investment analyst will tell you that it's far better to have numerous low-priced shared than a few high-priced ones. At this price, a moderate investment (let's say $10,000) gets you only about 100 shares. That means you're completely at the mercy of the stock price (which we know to be oh-so-stable in the tech industry).

No, what'll be interesting is to see what mutual funds grab onto Google as part of their portfolio, and at what percentage. We know it's "risky", but is it considered growth? What percentage will make sense in a mutual fund? 5%? 25%? Those are the questions I'd like to see answered.

Re:Web index as revenue generator

Take a look at the past ... Cobalt, VA, Red Hat all skyrocketed to this price level after their IPO. The only people who got the opening price were friends of brokers and the companies didn't see anything past the opening price. Yet they still changed hands readily throughout the day at those prices.

I don't think there is any question that all the shares will sell. If they don't change hands after selling, Google isn't going to care as they will still have raked in billions with this price instead of hundreds of millions with a lower price.

Is it actually giving anyone a -break-? No ... this price is no more friendly to the casual buyer than those other IPOs (well, not true, a couple of those went far past the $135 mark on first day so it is a boon there). But it is no less friendly to that investor either.

The difference is the brokers and their friends don't get an immediate cash-cow, they're on the same playing field. If I can't get a break, at least I know that the rich dudes didn't either.

Re:Web index as revenue generator

"Any investment analyst will tell you that it's far better to have numerous low-priced shared than a few high-priced ones."

Warren Buffett and Berkshire Hathaway (last seen trading at $88,075)might care to disagree witn you on that.

Re:Web index as revenue generator

Any investment analyst will tell you that it's far better to have numerous low-priced shared than a few high-priced ones

Which is why you should FIRE that analyst.

The reason for the many and low is that this makes people feel happier "hey I got lots of shares" and has little or nothing to do about the performance of the stock.

Google may well under go a split in the next 12 months, or even a few splits, but the worry about a high price making the share unstable is completely unfounded.

Think on it this way. If a share is $100 or 100c and it goes up 10% then its the SAME 10%. However a 1c adjustment in a 100c share represents 1% down. For the $100 stock its almost a rounding error. The TOTAL value of stocks in the company represents the important measurement. For mutual funds the value of one share is irrelevant as if you are buying $1bn worth of stock who cares what the number of stock is its the $1bn that counts.

Investment Analysts talk a lot of hooey most of the time. These were the muppets who raved about Boo.com, WebVan, Enron, MCI Worldcom, AOL... need I go on ?

You are ALWAYS completely at the mercy of the share price whether you have a 200 x $1 or 2 x $100, 10% up is the same amount, and 10% down is the same amount.

BTW IANAFA.... but then most analysts do worse than a tracker fund.

Re:Web index as revenue generator

The Internet is going to be around for ever

Isn't that what they said about the Titanic? Hubris has a dramatic way of destroying things. Google could suffer the same fate at this asking price. Pets.com seemed like a really cool investment in its day. Same goes for Dr. "kung fu" Koop.com.

The Internet itself will die soon for a variety of reasons (spam, peak oil, Super bugs, the Apocalypse). Just don't be disappointed when it happens.

Re:Web index as revenue generator

The Titanic was rushed and a lot of corners were cut when it was built, which was obviously bad in the long run.

You're talking outta yer damn ass. It took 3 years to build the Titanic. It wasn't rushed at all. No corners were cut; in fact, no expense was spared. And it wasn't a design problem or cut corners that sunk the Titanic. It hit a fucking iceberg! What's wrong with you?

Re:Web index as revenue generator

Actually, the Titanic cut a fairly serious corner -- they didn't have enough lifeboats for all the passengers.

That's a biggy.

New Meaning

'I'm Feeling Lucky' takes on a whole new meaning.

Re:Investors or the public?

I am still keeping my fingers crossed that they can remain faithful to their customers

Oh, you mean the people who advertise on google? Yeah, I think they'll do a good job of keeping those people happy. But people who use google's search engine just to find stuff are not customers...they're the product. Google main business is not selling search results, it's selling eyeballs. Just like any other media company (television, radio, etc...) who's job is to sell advertising, google's customers are the people who pay for advertising. When you start paying google to do a search, then you'll be a google customer...until you're the product.

Re:Investors or the public?

and 51% accumulation would mean a hostile takeover.

No. Sergey Brin and Larry Page have Class B shares with 10 votes per share, and they own a third of the company.

This means that, assuming you want to have to get as few Class Bs as possible, you would need to own 100% of the Class A shares, along with 40% of the Class B shares, which are not for sale, I might add.

Good luck on that hostile takeover.

Re:Investors or the public?

Google is only offering a tiny fraction of the ownership in this offering. If they raise $2 billion on a market cap of $36 billion, they've only let go of 5.5% of the equity.

High price but...

Who will actually be able to even buy it at that price when it hits? Most people probably wont be able to get the stock until its even higher. How does one go about getting a stock at its IPO price?

Re:High price but...

Who will actually be able to even buy it at that price when it hits? Most people probably wont be able to get the stock until its even higher. How does one go about getting a stock at its IPO price?

Open an account with a participating broker [businessweek.com].

That share price is nothing compared to Berkshire Hathaway [yahoo.com]. It's not the share price that matters, but the earnings per share ($5,190 in the case of Berkshire). A higher stock price is justified if earnings are high and have growth potential.

A bit steep for my tastes

Seeing as Google is everyones darling child now, and they have had much coverage over their cool technologies and decent methods of doing business, it looks to me like a bad buy. In other words, the price can only go down.

IANAstockbroker, and i have no money to buy stock anyway.

Change

Will going public affect google at all in terms of service, and their search algorithm? Investors won't get higher returns in searches will they?

Ironic?

Does anyone find it ironic that this story is a Yahoo story?

'Quiet Period' not very quiet...

Despite their "quiet period", Google have been busy making all sorts of announcements over the recent months, no doubt to bolster their valuation before the IPO. Moving into email with Gmail [gmail.com], entering the world of digital photos with Picasa [picasa.com], adding a new adsense for search [google.com] program, and improving their corporate search appliance [google.com].

They may also start leveraging the success of popular services that use their Web APIs [google.com], such as Google Alert [googlealert.com] and Copyscape [copyscape.com], particularly with the commercialization [theregister.co.uk] of Google Alert. Positioning themselves as a general technology platform for the web is surely a step in the right direction to further raising their valuation.

Will be interesting to see how quiet they stay from now till the actual IPO...

Re:'Quiet Period' not very quiet...

The quiet period doesn't mean you can't comment on any business activities. You just can't comment on anything relating to the IPO.

In the FT this morning

story about underwriters crying about the whole auction process and fear that price will be so high that market collapses after. Given their idiotic pricing and occaisionally illegal distributions in dot bomb ipo's, why should anybody take them seriously? Of particular note is that they are being paid significantly less than a standard IPO.

Share price is irrelevant

The price of a share is irrelevant. What is relevant is how much of the company you get for buying the share, and how much the total value of the company in question is.

All other things being equal, 10% ownership priced at $100 is a somewhat of a better deal than .00001% ownership priced at $100.

Re:Share price is irrelevant

Not completely irrelevant. For instance, companies will split their stock to make it more attractive (because stock buyers consider the price, no matter whether they should), and more to the point, they may do reverse splits when the price gets too low. One reason for that is that a lot of mutual funds and institutional shareholders won't buy stocks below $5.

So the higher it starts, the further it is from the $5 magic floor.

Dutch auction: bids start high and go down

Their opening bid is high, and they will bring the price per share down until there is a buyer. At that point, everyone else will buy shares at that price. I think their price per share will be in the 50-60 Dollar range.

Go Short Early?

With a high IPO like that, going 'short' after a couple of weeks might be a good strategy. The market is not stable and many outside influences (energy costs, Iraq setbacks) could easily drop 10% out in a day.

A bigger drop will possibly happen around election time. Whether irrational or not, Democrat wins tend to drop the market initially.

*NOTE* - the above statement is not my political preference, just an observation of how the 2k2 elections were referenced in the same manner

Price per share isn't that big a deal

Ultimately, your buying a piece of the company. Higher price per share is perfectly fine if you're getting a bigger piece of the company.

Consider 2 businesses of equal value doing IPO. One creates 1000 shares, and sells them for $10 per share. The other creates 100 shares and sells them for $100 per share. Which is the better deal? Duh! it's the same deal (essentially).

In this case, it appears Google is (or thinks it is) selling "large chunks" of the company. They could offer instead 10 times as many shares, for only $13.50 a piece. Maybe this would be smart. It apparently would suck in a large number of Slashdot readers!

And this crowd is supposed to be math-sci literate! How depressing... I think I'll go off and cry about the poor state of the nation's youth now.

IPO =

It's Probably Overpriced and it is.

Why so high?

Why not sell ten times as many shares at a tenth of the price? Is it deliberate to keep out smallish investors?

Re:Why so high?

It was a bidding system. Google said, "Hey, guys, we want to sell 26.4 million shares. How much would you pay for 'em?"

People wrote in bids and the amount they'd buy at that bid. Google took the highest until they'd sold all 26.4 million shares.

So the answer is, because someone was willing to pay that much.

Question

What difference does the price of the stock actually make? Isn't $1000 of Google the same regardless of how it's divided up?

froogle...

can i use froogle to find a lower stock price?

Google's Price versus Market's Price

If people are smart they will realize that Google isn't the one who sets the price. Due to the Dutch auction format it's the investors who set the price.

In Dutch auction you take the highest price and count down the number of shares till you run out. The last person to be issued shares at the lowest price is the one who sets the price for the *entire* auction. Everyone gets their shares at that price. So if you believe that Google is overvaluating their stock then what you need to do is pursaude the majority of those purchasing the stock that it should really be *insert fair market value* for the stock.

Personally I think the stock is worth about half of what Google said, but I am not a professional nor do I claim to be.

PE (Price/Earnings ratio) is the number to look at

With second quarter earning of $78M, and a projected market cap of $36B, the PE is 36000/(78*4)=115.

With a PE of 115 Google is an expensive stock & I guarantee Warren Buffet won't be buying at the price. By comparison banking stocks have PEs generally under 20.

Analysts (and I use the term loosely) try to spin these high PEs by claiming there will be high growth, and using Price Earnings Growth (PEG) models.

I won't be buying at that price.

Three months time

It's just a search engine. There are plenty of those. This stock will be trading at a fair price in no time at all. .... $4.50.

Re:They're not overpriced!

Wrong. They are offering less than 10% of shares to the public. ie they are offering $2B to the public.

The market cap will be over $36B, with most of this is being the current owners.

PE is 115 as per my other post.

Re:They're not overpriced!

So we've got about 24.6m shares. Profit per share is in the $11-15 range. The price per share is about $108-135. This puts the P/E ratio at about 7-12, which is extremely low. P/E Ratios are usually in the teens, and for .com IPOs have been in the 20+ range.

You're missing that the 24.6 million shares really only represent about 10% of google. Which means your math is off by an order of magnitude--instead of a P/E ratio of 7-12, you're looking at 70-120 which is not a good deal.

dutch

For those of you who don't know. Dutch auctions are only useful to the seller if the buyers anticipate a lot of people investing at the stated price. Pretty much describes Google here.

Since the price goes *down* from there, Google is relying on a lot of (for lack of a better term) stupid geek-types to buy at the $108-$135 price. If you put in a bid at $75ish, you might still get shares.

What's nice about the Dutch auction is you get to pay what you think the shares are actually worth. If you pay at the $108-$135 range, you're going to be seriously overpaying and will be disappointed when the stock starts selling publicly at $85 by the guys that got a thousand shares at $75.

These are just example prices, but it totally rewards the people who bid lower and still get at least some of the stock whereas those that bid high get all they bid for.

It's kind of lame that Google is doing it this way, IMHO, because they will end up totally scamming some of their biggest supporters into paying such a high price. That is, some of those in the /. crowd that can afford to invest in them.

Hope those of you that actually bid $135 think it's really worth it, cause you're most likely to be disappointed in the long run.

But to each his own. I could end up being wrong about it. There are articles about this stuff:
http://slate.msn.com/id/1002736/
http://b iz.yahoo.com/ibd/040709/tech_2.html

Basically, Google is ensuring that "insiders" don't get rich off of them, but that doesn't help *you*, the average investor, at all if you are looking short term and not long term.

I think by choosing Dutch they are looking for long term investors.

Google = Money

Now would be a great time for me to direct you all towards this illustrated commentary: Google = Money [gamespy.com]

-JungleBoy

Better results with yahoo search over google?

This weekend I was looking for some software that would be used for live performance midi work under Windows. My goal was to control lights/lasers, but none the less I noticed when searching google most of the results were crap pages setup to rank high on google.

I turned to Yahoo's search, and found much better results with less fake keyword filled pages. This is the 3rd time recently I've discovered this.

Is google a victim of it's own success? I love the uncrowded google page, this is what attracted me to google in the first place. Now I'm starting to wonder what I'm missing by relying solely on google. Yahoo responded quickly, although the site is crowded.

Thoughts?

What could affect their IPO?

I'm just thinking how often, if it's even legal, for a company to go out of its way to jeopardize a companies IPO. Take for example if MSN and or Yahoo! a few days before their IPO date if they filed (one or many) lawsuites for copyright infringement, IP reasons, SCO attacks because of licenses etc, or any number of things specificlly to bring down there sales of stock. Would this affect the interest that investors would have in the company? If so how much?