"Google
That's a comment we happened across on the Yahoo! discussion boards the other day. And like so many Yahoo! discussion board posts, darn it if it didn't get us to thinking. Is this possible? Will Google be a $100 trillion company within our lifetimes?
Let's go to the videotape
Obviously, one determining factor here is the length of time defined by "lifetime." So we ran the numbers.
|
Year Google Is Worth $100 Trillion |
Required Annual Growth |
|---|---|
|
2016 |
94.3% |
|
2026 |
39.4% |
|
2036 |
24.8% |
|
2046 |
18.1% |
|
2056 |
14.2% |
|
2066 |
11.7% |
|
2076 |
10.0% |
|
2086 |
8.7% |
|
2096 |
7.7% |
|
2106 |
6.9% |
If you plan to live for 100 more years and Google is around for 100 more years, then we think it's likely that you'll see Google valued at $100 trillion. The 6.9% annual return is only a few percentage points ahead of the historical rate of inflation.
If, however, you leave this earth within the next 10 years, there's simply no way you will see Google worth $100 trillion. It would have to tack on nearly $10 trillion every year for the next 10 to make that happen.
But what about 14.2% annual returns for the next 50 years? Is that reasonable?
A little perspective
According to Wharton finance professor Jeremy Siegel's research, Altria
But here's the rub. That return early Altria investors earned was possible only if they reinvested dividends -- meaning they used the company's payouts to buy more shares of stock at an often depressed price and the return wasn't directly related to growth in market cap. That's also a rub, because Google doesn't yet pay a dividend.
David becomes Goliath
Moreover, Google is far larger today than Altria was way back in 1957. Today, Google is valued at $130 billion. It is the 28th largest company traded on the major U.S. exchanges, sandwiched between two iconic U.S. businesses, AT&T
Also working against Google is the statistical concept known as "reversion to the mean," which states that the greater a variable deviates from its average, the less likely it is to deviate as far in the future. The historical average return of stocks is approximately 10% per year. Since its 2004 IPO, Google has returned 93% per year. It is therefore unlikely that Google will ever exceed this annual return again, because its returns will fall closer and closer to 10%.
Factoring in all of the above, we'll predict that if you live to 2070 and Google is around in 2070, it will likely be capitalized at $100 trillion.
64 years? C'mon!
Bullish Google investors will undoubtedly scoff at that guesstimate. They may be hoping for a $100 trillion Google by 2040 (20% annual returns for the next 34 years). But that growth would be an incredible (read: nearly impossible) feat. As the 28th largest public company in America, Google is simply too big to offer eye-popping returns for decades on end.
That's no knock on Google -- it's a solid company with a wide moat. It has a ton of cash, which could one day be used for a dividend. And with 300%-plus returns since the IPO, it has been generous (read: ridiculously generous) to early investors. But as we've said, Google's size prevents it from 24,000% returns in a decade.
Davids that are not yet Goliaths
No, that's the domain of small- and micro-cap companies. Consider: Since Google's August 2004 IPO, 108 companies have outperformed the search engine pioneer. Of those, 106 were "small caps," which in our Motley Fool Hidden Gems investing service we define as capitalized below $2 billion. (Tenaris
The biggest gainer since then? NutriSystem
With great power comes great responsibility
Small caps offer the best rewards on the market -- although they bring more operating risk than, say, Google. Small caps also have fewer professional analysts covering them, and they're more volatile than the market at large. So while most asset-allocation experts will tell you that you need to be in small caps, you should tread carefully -- they can burn you if you're not careful.
In our Hidden Gems small-cap service, we try to be as careful as possible in our search for outstanding small caps. We stick to a strict methodology when hunting for the handful of winners out of the more than 3,000 small caps that trade publicly. Thus far, the results are gratifying: Hidden Gems picks are beating the S&P 500 by more than 14 percentage points since inception in 2003. You can see all our small-cap picks and tricks for free with a 30-day trial.
Click here for a month-long trial to Hidden Gems. It's free, and there is no obligation to subscribe.
Neither Tim Hanson nor Brian Richards owns shares of the companies mentioned in this article. Neither Tim nor Brian has gotten a flu shot, either. Yahoo! is a Motley Fool Stock Advisor recommendation. The Motley Fool has a disclosure policy.
