Gooooogle Grooooowth
February 02, 2008
– Comments (6) 
RELATED TICKERS: GOOGL
I am of the opinion that Google is full of hype that has sent its share price beyond reasonable valuations. No question the growth story is good, but investor expectations go far beyond reality.
I have done a couple posts looking at Google and tried to demonstrate how this growth rate stuff for pricing investments is increasingly nonsense as the growth rate get higher. The example I used previously is:
 Daily rate
 Compounded rate

A
 8%  10,000,000,000% 
B
 8.1%  13,000,000,000% 
B minus A
 0.1%  3,000,000,000% 
C
 0.0%  0% 
D
 0.1%  27% 
D minus C
 0.1%
 27%

The difference in the rate being compounded each day of the year in the two examples is a mere o.1% difference yet with the high rate the magnitude of the difference at the end of 240 compounding periods is enormous, 3 billion percent versus just 27 percent. As the growth rate become large the numbers you get back a equally nonsense and this is the basis of the theory people have used in justifying Google's price because of "growth."
So, lets have a look at Google's eps:
Quarter
 Earnings/ share
 1% increase over last Quarter
 2Annualized Quarter Growth
 3Annual Growth to Q4/04

Q4 2003
 0.10  n/a
 n/a
 n/a

Q1 2004
 0.24  140%
 3218%
 3218%

Q2 2004
 0.30  25%
 144%
 800%

Q3 2004
 0.19  36.7%
 83.9%
 135%

Q4 2004
 0.71  274%
 19400%
 610%

Q1 2005
 1.29  81.7%
 990%
 674%

Q2 2005
 1.19
 7.8%
 27.6%
 421%

Q3 2005
 1.32
 10.9%
 51%
 337%

Q4 2005
 1.22
 7.6%
 27%
 249%

Q1 2006
 1.95
 59.8%
 553%
 274%

Q2 2006
 2.33
 19.5%
 104%
 252%

Q3 2006
 2.36
 1.3%
 5.3%
 216%

Q4 2006
 3.29
 39.4%
 278%
 220%

Q1 2006
 3.18
 3.3%
 12.7%
 190%

Q2 2006
 2.93
 7.9%
 27.9%
 163%

Q3 2006
 3.38
 15.4%
 77.1%
 156%

Q4 2006
 3.79
 12.1%
 58.1%
 148%

1This is a quarterly rate of return (loss).2The rate must be taken to the 4th power to get the annualized rate. 3This is what the annualized rate of return is if it was constant back to Q4 2003.The rate of growth is clearly declining, as this graph shows: (continued in the comment)