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I’m in the midst of reading The Smartest Guys in the Room, the story of the rise and fall of Enron and it got me thinking about Google and it’s rapid stock ascent.
There was a time when Enron could do no wrong. From Wall Street analysts to the President of the United States, Enron was the model of corporate innovation and success. In January 2000, the company’s stock hit $88, up from $3 in 1985 – an increase of almost 30X in 15 years (200% a year).
Every Enron innovation was heralded as a move of sheer brilliance. Enron plans to create a market for broadband bandwidth? Brilliant! Enron wants to provide electricity directly to consumers? Bye, bye utilities! Whatever the folks at Enron thought of, it would surely be a rousing success.
Of course, Enron wasn’t a success. In a few months in 2001, the truth about what was happening inside Enron became clear and the stock went to zero.
Obviously, there are some major differences between Google and Enron. For one, as far as we know, Google’s revenue is real, they aren’t cooking the books, and Google has a real, proven financial model.
Second, Google exists in the post-Enron world, where investment bankers and accountants are at least a little less willing to let corporate America get away with lying to Wall Street. So, from a financial standpoint – between real and fake revenue – the two companies couldn’t be more dis-similar.
What I find similar between the two companies is the euphoria that surrounded them at their height. Google, like Enron, can launch any new product and see their stock shoot through the roof. Google Base – it will kill classifieds!; Google Print – the end of publishing!; Google Video – destroying NetFlix and Blockbuster! Every time Google sneezes, Wall Street analysts raise their stock estimates. From $150, to $250, to $400 – some analysts now suggest that Google could rise as high as $2000 a share.
All of this could be possible. What troubles me, however, is that so far, the only thing that Google has really done well – from a financial perspective – is AdWords and AdSense – the two products that they’ve had since 2002. All of the other ballyhooed products unleashed over the last four years have been very neat, very useful, and very cool, but not too impactful to Google’s bottom line.
What is the collective revenue on Google Maps, Google Base, Froogle, GMail, Google Appliance, Orkut, Picasa, Urchin, Google Talk, and Google News? As far as I can tell, not a lot. Sure, Gmail users do see Google ads on their email, but how many actually click on them? And a lot of other Google products have never even attempted any sort of monetization.
Thus, like Enron’s stock jumps when they announced broadband and consumer energy plans, Google’s stock run-up has largely been due to the potential of future revenue, without any evidence that this revenue will ever take materialize.
One salient point that is made in the Enron book is that Wall Street analysts see no wrong when they are high on a stock, but see no right when they are bearish. As long as Google’s core products – AdWords and AdSense – continue to grow in revenue and profit – analysts will continue to laud Google and the stock will continue to rise.
My prediction, however, is this: one quarter of stagnant or even slowed growth will cause these analysts to turn and run as fast as they can in the other direction. And at that point, no amount of clever new products without revenue will be able to stop Google’s shares from going down, and fast. And that day will come, as surely as death and taxes.
So, is Google Enron? Of course not. Can Google stockholders learn from Enron. Absolutely.