Omakase

Thursday, December 15, 2005

BUY: Google LEAP Put Jan. '07

Right now, Google is on fire, mostly for good reasons (though a bad reason - thin float also explains things). The result is the 24th largest company in US markets by market cap, larger than big, important companies like Novartis and Wells Fargo. Valued at $125b ($420/share), Google will pass IBM's valuation if the stock rises just 7% more.

I'm a fan of Google, but I can't justify such a lofty valuation.

Google gets 99% of it's revenue from advertising. I don't believe that Google can continue the growth rate that justifies such a lofty valuation, nor do I believe that it's competitors will allow it - already MSFT and Time Warner are considering how to jointly maximize AOL's ad platform, while Yahoo isn't standing still either.

In financial terms, GOOG has $5B in revenue and $2B in EBITDA (or thereabouts), valuing the company at 25x revenue, or 62x EBITDA. (Current P/E of 93 and forward P/E of 49; PEG of 2.36). In short, it's an overheated stock.

But it's always dangerous to bet against a charging bull like GOOG. A mistimed short could cost a fortune.

So, betting that GOOG has to come back to Earth sooner or later, I just bought a LEAP put option at $320, dated January 2007. I paid $17/contract, so if Google drops to $303 before Feb 1, 2007, I'm in the money. If not, I'm out $1,700 (1 contract).

So, I'm gambling $1,700 that Google drops 28% over the next 14 months. If GOOG were to drop 33% to $281, I'd make a profit of $2,200. Should it drop by 50% -which I could easily see happening - I make $9,700 in profit.

(Or, I could always sell the LEAP before expiration. In this scenario, I could still make a profit before GOOG hits $303.)

It's a silly bet against the current wisdom, and I could be hilariously wrong (I've suggested shorting when GOOG was at something like $200), but I'm comfortable taking the risk. It's not for everyone. Is it for you?

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With my new friends on the Great Wall of China

With my new friends on the Great Wall of China
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"I do not choose to be a common man. It is my right to be uncommon -- if I can. I seek opportunity -- not security. I do not wish to be a kept citizen, humbled and dulled by having the state look after me. I wish to take the calculated risk; to dream and to build, to fail and to succeed. I refuse to barter incentive for a dole, I prefer the challenges of life to the guaranteed existence; the thrill of fulfillment to the stale calm of utopia. I will not trade freedom for beneficence, nor my dignity for a handout. I will never cower before any master, nor bend to any threat. It is my heritage to stand erect, proud, and unafraid, to think and act for myself, to enjoy the benefit of my creations, and to face the world boldly and say, "this I have done." All this is what it means to be an American." -- Anonymous