John Hussman, manager of the Hussman Strategic Growth Fund (ticker: HSGFX), took another shot at Google (ticker: GOOG) in his weekly letter. Extracts:…
Hussman does something that looks like analysis and has a superficially persuasive quality, but it involves a common error. Gauging Google by revenue multiple and comparing it to GE ignores the basic business model, which has much higher margins and no manufacturing cost. Why not compare it to Rambus or Qualcom or Microsoft, where a much larger fraction of revenues drop to the bottom line?
We shall refer to this by the category, Choosing the Wrong Metric. Those analyzing the housing market, for example, look at the ratio of home price to gross income. Well that worked just fine back when the OldProf bought his first condo, but I was paying double-digit interest rates. These days, rates are so low that people can pay a quite reasonable fraction of take-home pay and still buy a more expensive home.
Please note that I am not saying that GOOG is a value or that there is no housing bubble. I am saying that the analysis of either topic requires a better choice of metric.