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Question:


Which would be more strategic in making the most money in the long run: Investing in BP or investing in Google?
-SC_Ethan


Answer:


This is officially the best "Ask the Expert" question ever. It's also the one for which it is hardest to come up with a good answer, and not just because I make no claim to possessing stock-picking prowess. I gather that you chose these two companies because they are opposites in so many fundamental ways and so you thought that the contrasts would make the selection process an interesting intellectual exercise. If so, you were right, but with so few clear points of comparison, there is little on which to base the choice.

Google is a 21st century business and BP's line of work goes back to the 19th century. Google's earnings should grow faster but with less certainty, and investors will have to pay a lot more for Google's earnings in the immediate future than BP's. Google's stock has a price-earnings ratio of nearly 18 based on the earnings that analysts expect the company to generate next year, compared to roughly 7 for BP. That means it costs nearly $18 and $7 to buy each dollar of Google's or BP's earnings, respectively. The discrepant growth prospects make a big valuation gap reasonable - shareholders don't just have a claim on next year's earnings, after all, but on all of a company's earnings after that - but figuring out how much more expensive Google should be is difficult to calculate.

BP's earnings probably will continue to grow at a steady pace for many decades once the Gulf of Mexico oil spill - for which the stock has taken a huge hit - is paid for and liability claims are settled. At some point Google's earnings are bound to level off as its technology spreads across the globe and there are fewer new users (do you know anyone who has never done a Google search?) and as the next wave of technological breakthroughs comes along to replace Google's. There are formulas that analysts use to estimate what a stock is worth based on its future earnings, but filling in the blanks for these companies involves a lot of guesswork.

I'm not crazy about either stock, and of course there's no reason that someone can't own both or neither, but if I had to choose, I'd pick Google. It's still not clear when and in what financial shape BP will emerge from the spill episode. There's a big unknown about Google, too - the potential backlash over privacy and the massive amount of personal information that the company stores from people's searches. Still, Google has shown an ability lately to diversify away from the search business and into smart phones and other technology segments, and its valuation does not seem unreasonable in relation to the broad stock market or to the company's growth potential and financial and commercial strength.

-Conrad de Aenlle



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