Thursday, September 29, 2005

Back into Google

Last Friday, just before the US market closed I scraped together all my pennies and bought 12 shares of Google for $316 each. Hardly a bargain when you consider that they were at $280 less than a month ago but I was worried that the share price would never retrace it steps. Of course as soon as Monday came it did retrace its steps a bit but this is a long term holding.

My growth portfolio is extremely under-diversified and extremely fun. I have two main long term holdings - eBay and Google. I also have a stake in Verisign. My only other holding in my growth portfolio is a few Rolls Royce shares - I am building up a stake in them on a monthly basis.

So my portfolio is almost entirely US internet stocks. That is the way I like it. As a software engineer I feel I have a reasonable understanding of the massive potential of these companies.

Over the long term the share price follows the EPS growth. If eBay and Google can keep growing at 30% a year for the next 8 years or so the share price growth should be over 20%, allowing for P/E ratio decay. That is good enough for me.

Verisign is more of a medium term valuation play. I thought they were undervalued at $25. Unfortunately two months laters the shares are at $21! I think when a company's share price plummets after a bad earnings report I am going to make myself wait at least one month before taking advantage of the low price because this year with eBay and Verisign the share price has kept going down for weeks after the initial report.

So it is Google, eBay and Verisign for now. Lets see if this internet bubble really has burst.

Thursday, September 22, 2005

Wait for me Google!

In the last few weeks bells and whistles have been going off in my head saying it is time to get back into Google before I miss the next big run up of the stock. Why do I want to get back in?

1) The market seems to constantly under-estimate the growth potential of Google. This has been true since the IPO when almost every earnings release has resulted in a re-rating of the stock. The stock is currently on a forward P/E of about 40. This is high but not that high considering the growth Google is experiencing.

2) Analysts are being reserved about Google. I think some analysts would like to have a $400 plus price target on Google but are too embarrassed to do so as it smacks of 1999. Jim Cramer in a recent article apologetically talked about GOOG reaching $900 in a few years but then went back to the $350 target so as to stay credible. I read another article recently where one economics professor put all Google's metrics into some valuation engine and came out with a valuation of $110! This is so hilarious I cannot believe they printed it! A forward P/E of 15 for a company growing at over 40%? Right.

3) Growth is so cheap. If a retail outlet wants to grow it needs to invest in new stores and new staff - a costly and time-consuming process. Google just needs to keep on providing killer apps and viral marketing will do most of the rest. I do not remember seeing any ads for the Google search engine - I used it because my work colleagues were using it.

Google has already become the web services portal for most people. Considering the speed they are developing new tools I do not see this changing.

So where am I to find money to put in Google? With no spare cash around it was a fond farewell to Big Yellow (UK small cap real estate play) and Frontline (Oil Tankers.) BYG.L have made me a modest profit of about 7%. I am still a big admirer of the business model and the management. Maybe when the P/E comes down I will be able to buy them for my mortgage portfolio. Frontline broke even when the two dividends are factored in. Unfortunately I got in at a bad price but it has been an interesting experiment. I am not sure if I would buy into FRO again. I love the dividends and the management seems strong but I really have no special inclinations about where the oil tanker industry is going.

Now I am just waiting for my sales to settle and the cash to clear. I just wish the Google share price would stop going up in the meantime! Come back here GOOG!

Tuesday, September 13, 2005

eBay gets Skyped

Yesterday eBay announced that it was buying Skype, the Internet phone calls company, for $2.6 billion. $2.6 billion for a company with no profit, about $60 million in annual revenue and limited synergy with the online auction business. Has eBay gone mad?

The price is a bit steep but what eBay is interested in is not the current revenue figures. It is the number of users (52 million,) the growth (going through the roof at the moment) and the brand (Skype is well known in both the business and consumer community.)

The $2.6 billion price tag means eBay have payed $50 for every registered user. However the speed this thing is growing means there could be 500 million users in 5 years time which works out at a more reasonable $5 per user.

Skype's penetration into America is limited at the moment so there is huge scope for eBay to use some of its cash mountain to market Skype in the USA and bring about some serious growth. No doubt eBay will find a way to integrate Skype with its online auction sites, probably more as a way of advertising Skype than anything else.

As for seriously monetizing the use of Skype I imagine that will come later once a big enough community is built up. For now it is about growth, growth, growth.

If you wanted to invest in Internet growth then three areas you would want to get into would be auctions, payments and VoIP. With eBay you can now buy the leader of all three! For those with a long term view I would say buy, buy, buy!

Saturday, September 03, 2005

Yawn Yawn

The market boredom continues.

I got back from my holiday to find my portfolio had lost over 5% whilst I was away. The downward drift continued this week with the hurricane and the oil prices obviously weighing on investor's minds.

"Wake me up when September comes." Now I know what Green Day were singing about. Hopefully after the Labor day weekend the situation in New Orleans will start to improve, oil prices will come down and the markets will start moving again.

The only bright light in my portfolios in the last few weeks has been Frontline Ltd (FRO.) FRO's quarterly results surpassed analysts' expectations and the forecast for the rest of the year was optimistic, sending the share price to levels not seen since early May. Add the ex-div share price to the dividend I have received already and the dividend owed to me and I am in profit. Finally! It is not hard to eventually make a profit when the shares are yielding over 25%! Obviously that level of dividends may not continue but then how many highly profitable companies do you know with a P/E of 3? I would like more FRO in my portfolio but then I really want to buy back into Google soon before it goes on its next run. These sort of decisions are what make managing an aggressive portfolio spicy!

The market, and consequently this blog, has been rather uninspiring of late. Lets hope for some excitement in the autumn or I will have to give up and put everything in an index tracker!