Salient to Investors:

David Stockman writes:

Google’s unwarranted market cap gain last Friday – 75% of the 9.6% gain in net income from the prior quarter was due to a lower tax rate and a cutback of ballooning G&A expenses – easily passed in one day the entire $50 billion market cap of Caterpillar, though only just beat its gain on April 17, 2000.

Google is entering corporate middle age: since 2011, its growth rate for both sales and net income has slowed to 15% per annum. 90% of revenues are from advertising, which is slowing and becoming saturated. The easy digital share gains have been had and no one has eliminated either the business cycle or the cyclicality of ad spending. Google has not invented a new product that’s on a 100 times or 1000 times market penetration ramp.

Adam Parker at Morgan Stanley argues that today we are dealing with real companies with substantial sales and earnings – 90% of tech firms have positive operating margins – whereas in 1999, less than half of the tech companies were profitable. Yet the aggregate market cap of the 12 big cap techs before and after the dotcom bubble – Cisco, Dell, Intel, Microsoft, Lucent, Juniper Networks, Hewlett-Packard, Nortel, WorldCom, Global Crossing, General Electric and AIG – went from $600 billion in December 1996 to $3.8 trillion at the March 2000 peak – unjustified on sales and earnings growth during the period. By 2012, 4 of these companies had disappeared and the market cap of the remainder had dropped 78% from the peak. The overall market value gain of the twelve companies from 1996 to the end of 2012 was a mere 2.5% per annum.

Wall Street sounds like February 2000. Last week at least 5 brokerages raised their 12-month targets on Google to $800, making Google only the second company to Apple to be valued above a half-trillion dollars. Cisco’s $555 billion market cap at the peak dropped 85% by October 2002 and even today is still down 75%, despite sales at triple and net income at nearly 4 times higher than 2000 levels. In April 2000, Cisco was trading at 220 times reported earnings versus 13 times today.

The total market cap of Morgan Stanley’s New Tech Index of 16 high flyers – Google, Amazon, Baidu, Facebook,, Netflix, Pandora, Tesla, LinkedIn, ServiceNow, Splunk, Workday, Yelp, Priceline, QLIK Technologies and Yandex – total $1.3 trillion versus $21 billion of total trailing net income, or a multiple of 61 times. Excluding Google, the total market cap for the other 15 is $840 billion versus $6.0 billion of earnings, or a multiple of 140 times.

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