What follows is meant solely as an illustrative example of how a value investor might think; we make no claims or recommendation to buy or sell any stock or security nor is the information you read necessarily still accurate by the time you see this article. Also, let me state that I have enormous respect for Google's founders, Sergey Brin and Larry Page; they've certainly improved the world and created an enterprise that allows countless businesses to generate revenue from the web, improving our nation's GDP and standard of living. This commentary does not regard them, but rather the faceless mass of Wall Street speculators that focus on momentum rather than fundamentals.
Berkshire Hathaway vs. Google: The Numbers
Larry Page and Sergei Brin, founders of Google, are big fans of Berkshire Hathaway. As a simple exercise, compare the two firms. With virtually identical market capitalizations (the price it would take to buy all shares of a company's outstanding common stock at the current market value), what exactly is an investor in each respective firm getting for his (or her) money?With Berkshire Hathaway, you are buying a business that has little or no debt (in the traditional sense; the insurance reserves are very real liabilities but a fair amount of the reported debt figures are those of the subsidairies that are not guaranteed by the corporate parent company, meaning that under no situation could they be held liable for those amounts but due to the limitations of GAAP they must report them), $47 billion in investments in businesses such as Wells Fargo, Coca-Cola, Wal-Mart, and the Washington Post, $45 billion in cash, and $8.5 billion in net income. Perhaps, most importantly, the income is generated from over 96 diverse operations that are generally not correlated - meaning if the insurance group experiences a catastrophic loss due to a 9.0 earthquake in California or a severe hurricane in New York, the candy companies and furniture businesses are still going to be trucking along, generating cash.
With Google, on the other hand, you are paying nearly the same price for the entire business yet you are only getting a company that generated $1.5 billion in net income, has little or no debt, and $9 billion in cash on the balance sheet. Most concerning, virtually all of its income comes from a single source - paid search listings.
Why has the market placed such a high value on the internet firm and priced Berkshire more rationally? Google's growth has been nothing short of explosive. However, at nearly 63 times current earnings, even if the firm were to grow its profit to the level of Berkshire - $8.5 billion - it would still lack the liquid assets and marketable securities the house that Warren built has, and it would not have a diversified income stream, making it far more vulnerable to changes in the competitive landscape; a major concern when you contemplate that Google operates in an industry where dramatic shifts consumer behavior can happen overnight. At the point the growth began to slow, the multiple would contract, meaning that even if its earnings do grow 600% in the next few years, if it becomes subject to the law of big numbers - that ever increasing amounts eventually forge their own anchor - the result would be a market capitalization substantially similar to today, leading to no increase in the stock price over a long period of time.
