Is Google Overpriced?

You know, if you would've asked me when Google was selling at $423 whether or not the stock was overpriced I would have said yes. Does that make me a fool? Perhaps - but a conservative fool.

I view Google's rise as primarily a matter of the "greater fool theory" in practice. Google will eventually miss expectations. There will be a natural slowdown, its weight will catch up with it and momentum will begin to reverse. Is that to say I don't like the company? No, far from, however if history teaches anything it is that no growth company can grow forever. There is no immunity card that protects you from the inevitable business cycle.

Most importantly, I don't want to be the person unfortunate enough to not have a "greater fool" to rescue me from that bad decision. I don't view Google as speculation at this point, I view it as placing a bet on how long the irrational optimism can last. Equally I wouldn't short it either, its just too dangerous of a stock to associate with at the moment because it has fled the realm of fair value.

Interestingly enough though, its not the most overly optimistic choice in the search engine industry. Both Yahoo and Baidu are even more dangerously overvalued. Baidu is currently trading at a P/E of 187, with a forward P/E of 57. In other words, it has the next decade of astronimical growth already priced into it.

Does that mean Baidu or Yahoo or Google are going to deflate tomorrow? Probably not but its a certainty that they will over a long enough period of time and I'm not going to be caught holding one when they do.