Google to be Added to S&P 500 Index

hrbrmstr writes "According to marketwatch.com, Google is being added to the S&P 500, replacing Burlington Resources Inc. While this has provided a short-term boost to the stock price, time will tell what the overall impact will be on this respected index and the institutions (i.e. mutual funds) that follow it."

It's 1999 all over again

[hadj]

People have been saying this and I will say it again: these are signs of a new internet bubble. People (tend to?) forget. Lessons are learned the hard way.
Although Google's image and bank deposit have become big, be aware their revenues are almost 100% dependent of advertisement revenues. This is a market which can turn upside down in a second.

Re:It's 1999 all over again

[way2trivial]

indeed, their 10-K filing says in 2003 advertising sales made 97% of their revenue, and 99% in the years since..

I don't disagree that the advertising market is volatile, and what has been wrought, can be undone--
But I don't think in that market, a new evoloution (as theirs) can be done without some advance notice..
i.e. I think the signs of impending DOOM would be far clearer than anything visible right now, there is nothing on the horizion
and there is little chance for an upstart to topple google, in a very 'instantaneous' amount of time...

I believe the adage is, as long as a business has been open, is as long as it can expect to stay open?

Re:It's 1999 all over again

[Bemmu]

And there are some interesting contenders out there. Google tends to forget that there are people living outside the US, UK and China. I'm sure they are getting there, but while they linger there are others moving into attack positions. The local ones mentioned before are eating away their user share, since they can take into account location & language specific things that Google may be ignoring while pursuing it's grand world domination plan. In some languages a simple word by word matching scheme may not be enough and conjugation needs to be considered as well. Google has also upset some folks with the China censorship thingy and wanting to move all the users' data on their centralized servers, in general displaying the sort of arrogant behavior that slowly makes people want to see them fail.

Perhaps the most interesting engine to flock to would be http://www.majestic12.co.uk/ [majestic12.co.uk], a seti@home style distributed indexing system. Sure they're not to Google's index size yet, but they are getting there, faster and faster... and the fairness of their ranking algorithms are open to view and discuss -- perhaps with time such closed algorithms could be viewed with as much dislike as Microsoft's closed OS sources. I wonder if Stallman is using it.

I am not a Google hater myself, personally I feel their search engine is adequate for my needs and their goal of organizing the world's information a very appealing one (although so broad that they might as well have said "we'll do what we please"). All I am saying is that it would not be unthinkable that the public opinion might slowly change, not favorably for them.

Re:S&P?

[silverbax]

Standard & Poors 500 - a group of stocks that are chosen to represent the movement of the overall market. It's a better indicator than the Dow Jones index, which is only about 30 stocks.

As for Google joining the S&P, it doesn't mean anything other than a momentary blip on the stock price. It's an inflated stock which doesn't pay a dividend and is traded far over it's revenue. Personally, I wouldn't touch the stock, especially because not only is it overvalued, but the company could very easily be displaced by another company who comes along and does a better job. It's not like a group of college kids can get together and form a competitor to Exxon or Coca Cola, but they sure could threaten Google. It's just that the average, non-technical person wants to get on the next Big Thing Train and they've heard of Google, they probably use the search engine, so they buy the stock.

Re:It's 1999 all over again

[bay43270]

Are you asking how effective the ads are in terms of 'clicks per page impression'. That won't matter because advertisers only pay for the clicks. How well the clicks translate into sales can many times be measured directly by the advertiser (assuming the sales are online). So advertisers have a very good idea of how much these ads are worth to them, which is part of the appeal of this kind of advertising.

The real threat to google's advertising model is click fraud (and the fact that advertising revenues can't possibly grow fast enough to catch up to the companies market cap).

It's reasonable for S&P

[Vo0k]

Like Google has mission of providing good search results, S&P is about providing reliable index value. Google is representative of the IT sector and there's not much about it being 'good', 'strong', 'reliable' or anything like this. Google will be the first to go down the drain if the bubble bursts and S&P know it well - and pretty much that's why they added Google. Because it will pretty well show when the bubble bursts, resulting in accurate indication of the state of the market by S&P. Google may not like Microsoft but when people type 'MS Windows' in Google, they expect to be sent to the proper Microsoft webpage, and that's why Google keeps Microsoft scored high for these keywords in their results. Brokers watching S&P expect to see it go down when the stock is about to down really deep, so a group of companies that will go down first are likely to be listed. Google rides the tide of the net, new technologies, new developments, the leading edge - so they pretty well predict which way the market is going, stagnant, losing, gaining - they are useful as the indicator. So rejoicing or grieving about them being added to S&P doesn't matter and won't help or disturb Google all that much. It will help S&P.

Re:Good News

[nelsonal]

A couple of years ago, a stock whose business consisted of owning short term treasuries (silly but somewhat relavent) would have been priced at a 37% discount to their asset's market value at a 50 P/E. I think you'd agree that buying a treasury for 63 cents on the dollar represents a pretty good investment. Also, cyclical companies can see earnings swings of 300-400% from year to year, which can lead to cheap stocks with trailing P/E's that range all the way to infinity (no earnings last year--substantial earnings this year). While your rule is a pretty good one, there can be exceptions. It's generally unwise for value investors to follow any hard and fast multiple rules (aside from buy at a large discount to intrinsic value).

Re:It's 1999 all over again

[randomjohndoe]

>Perhaps the most interesting engine to flock to would be http://www.majestic12.co.uk/ [majestic12.co.uk], a seti@home style distributed indexing system.

Now that is an interesting concept. Indexing the web would seem to be the kind of parallel operation ideally suited for distributed computing. You'd still need a central server to search the index and provide results quickly. (Okay, I decided to RTFL rather than just speculate, and I see that's what they're doing.) My initial assessment is that this is the most credible medium term threat to Google I've seen.

>...the fairness of their ranking algorithms are open to view and discuss -- perhaps with time such closed algorithms could be viewed with as much dislike as Microsoft's closed OS sources

Another excellent point. I wish I still had mod points. The closed nature of Google's ranking algorithms has disgruntled some folks, and an open system could become popular. Robert Cringely did a series on the mysterious workings of the AdWords algorithm, and whether Google is using the algorithms to "unfair" advantage. "Unfair" being quoted because even if they are doing it, it is not illegal, and perhaps not even unethical. But they could be deceiving or "gouging" (another loaded term) their advertisers, and it could be seen as counter to "Don't be evil". Cringely includes Google responses.

The point is, the advantages of open algorithms are pretty obvious.

http://www.pbs.org/cringely/pulpit/pulpit20050922. html [pbs.org]
http://www.pbs.org/cringely/pulpit/pulpit20051006. html [pbs.org]
http://www.pbs.org/cringely/pulpit/pulpit20051013. html [pbs.org]

Re:Good News

[roach13]

While what you are saying is true on a basic level, the net impact on your funds is close to zero. The total risk/reward for any one stock, of the 500, when equally weighted, is insignificant. In fact, it may actually reduce risk by diversifying the S&P more. There are plenty of 'risky' stocks in the S&P 500, but it gains it's stability from having such a breadth of stocks that the maximum impact of one volatile stock is muted. If equally weighted, each company represents 0.2% of the portfolio. In other words, even if Google went bankrupt (anyone want to place bets on the odds of that happening?), the total impact on your portfolio would be a 0.2% drop. Now, if Google DID go bankrupt, the impact on the S&P would be much more severe, but that's more due to the related companies and the negative impact a major bankruptcy like that would have on the economy as a whole, and investor attitudes in particular. I for one welcome it - it's about time, their market capitalization, revenues, and balance sheet have placed them in the top 500 companies in the US pretty much since they went public.

Keep your SPDR's, manage the GOOG risk

[TopShelf]

If you're concerned that much about having Google in your S&P 500 mix, you can hedge against it by shorting Google (or using a proxy like long term put options) to the extent that they are represented in your S&P 500 holdings. If Google goes up, your S&P 500 holding goes up, but the hedge goes down, and vice versa in case Google tanks. For small accounts (under $25K) this might be clumsily achieved due to the impact of transaction costs, but for decent size accounts this is a readily available risk management method.

Or...

[Estanislao Martínez]

You can just get an index fund that doesn't duplicate the S&P 500, but rather samples a broader index. There's the funds with names like "Total Stock Market" which sample the Wilshire 5,000, and are a better choice for most folks; they're better diversified (since they try to replicate the performance of investing in *every* stock in the US market, not just the largish S&P 500 stocks), and there's far less worry about index inclusion events like this, since their target index includes *every* stock, by definition.

Even if you specifically want a fund that invests in larger US companies, there's non-S&P 500 based large-cap index funds. And if you can't easily move your money from S&P 500 funds, there's also "extended market" funds that buy everything *except* the S&P 500. These funds will now have to *sell* their Google stock, and put the proceeds into other stock.