Google (GOOG) is presently priced to perfection. Has there ever been an ad-based business model that deserved a PE of 25?
Google's recent rise is sparked by a change in fashion. I pounded the table here for networks over devices for some time, and now that is what people believe. Google's financials haven't really changed since it held a PE of 20 and was trading at around $600. Its margins have actually declined, year-over-year, since 2010. And its top line growth has not accelerated, only continued.
What has changed is that we believe the network will deliver growth more than devices can, and that we assume Google management, headed by CEO Larry Page, is committed to doing that. In other words, it's Google's credibility that has improved among investors, nothing else.
But among users, among customers, Google's credibility has been taking a hit. Look no further than this recent piece by James Fallows, where he says he is reluctant to commit to Google Keep because Google has canceled popular services like Google Reader. (Popular, that is, among people like him, and me.) Or try this one from TechCrunch, in which former CEO Eric Schmidt's promises to not merge Chrome and Android are dismissed out of hand, based on his own past statements.
The phrase "don't be evil" was derided throughout Google's first decade, and it was always an informal call. But it was an important touchstone nonetheless. It was what Google was trying to be, it was what made Google different.
There have always been people and groups who questioned Google's credibility. One of the best known of the early critics was Scott Cleland, who was doing the work of the telecom industry when he wrote Search & Destroy: Why You Can't Trust Google Inc. He's still at it, and he's no longer alone.
Now mainstream newspapers like the Philadelphia Inquirer are willing to take Google on in their editorials. It could well be that the closing of Google Reader, which was well loved among the digerati even if it wasn't a big consumer success, will prove a turning point here, leading to more skeptical coverage generally.
That could prove tough for Google, which is trying to enter so many different businesses, sometimes against its will. The old phone business is becoming an IP networking business, and Google has a bigger, better IP network than any phone company. The news industry is being replaced by social news feeds, and Google has the best. As Google spreads itself around the globe, it becomes increasingly vulnerable to the agendas of foreign governments, and it needs the support of western publics even more than before, even while it's losing that.
The term credibility gap, first used by the late Sen. William Fulbright in connection with Vietnam, has come into the language to reflect any disconnect between reality and what someone powerful says reality is. Google is now someone powerful. Google's credibility gap is growing.
Shareholders should be concerned.
Oh, alert readers will note at the bottom of this story that I am long Google. I should add that I recently sold off half my holdings, took some large profits, and that I remain convinced of Google's long-term future. But I think in the near term it's in for a bumpier ride.
Disclosure: I am long GOOG.