First-ever YouTube video posted 9 years ago

Uploaded on Apr 23, 2005

You know I have been pounding the table for the last five years about how the stock markets and risk assets were heading into another huge bubble, this time perhaps bigger than any of the great bubbles before, including the dot-com bubble, the real estate bubble and so on. Put simply, I’ve been positioned for and have been expecting this ongoing bubble-blowing bull market mainly because the Federal Reserve with its QE and 0% interest rate policies along with Republican Democrat corporate-subsidizing policies would combine to force people into the stock market and other risk assets.

I recently highlighted a retired couple that I helped with a Deep Dive portfolio analysis and how they are living examples of the risk-on trade that’s being forced upon all savers who seek some sort of return of more than 1% a year while interest rates remain at 0% or barely even more than that for the next few years. That risk-on trade from retirees and savers is creating ever bigger bubbles in high-risk assets like the stocks of companies with unprofitable operations and/or highly questionable earnings growth. Pot penny stocks, fuel-cell stocks, start-up stocks, app stocks, and many other equities are inflated right now and are already in bubblicious territory. Want proof?

Knowing that Facebook recently paid nearly $20 billion for Whatsapp, what would you figure Android would be worth right now? Both are going to have more than a billion users, but only one is truly a platform that’s had many billions of apps downloaded onto its proprietary and installed and still growing user and vendor base. That would be Android, not Whatsapp, of course. If Android were still an independent company and had gone public with an IPO in the last couple years, I expect that it would be worth $100 billion or more. Netflix, for another comparison, is currently worth $20 billion and was recently valued at more than $30 billion in the stock market.

So what did Google pay for Android and its site (Android.com) and operating system and its other assets back in 2005 when they did the deal? Reportedly, Google paid about $50 million for the rest of the equity it didn’t already own in Android, which had gotten funding from Google already to help start up.

$50 million in 2005, nine years later and it’s now worth $100 billion. Good job, Google execs.

And there’s also the YouTube purchase that Google made back in 2006. If Netflix and LinkedIn are today worth $20 billion, and Twitter is worth $25 billion and Facebook is worth $150 billion, what do you figure that makes YouTube worth right now if it were a publicly traded stock? Probably also close to $100 billion.

And what did Google pay for YouTube? $1.7 billion. And I remember sitting at a dinner with a Google biggie executive a few days after that YouTube deal was announced and he said to me, “We would have paid anything to buy YouTube.” The implication being that $1.7 billion was by far the high end of the offers that YouTube was getting for its business at the time.

If you were a hedge fund manager and you had invested $2.2 billion in two different companies in the last ten years and you’d seen their value increase to $200 billion over that time frame, you’d be a legend. Google’s also created billions in value with their DoubleClick, Admob, and other brilliant purchases throughout the ups and downs of the markets and valuations over the last decade since Google came public and since I’ve owned it. (See: List of mergers and acquisitions by Google on Wikipedia for more) They’ve certainly made some loser acquisitions over the years too, including Slide.com which they paid more than $200 million for and which was shut down less than two years later.

Google itself is right now worth about $355 billion, which, based on my valuation analysis of YouTube and Android above, means the markets are valuing the rest of Google combined, including all its search and ad businesses at just about $150 billion. Think of it this way, without YouTube and Android, the markets are saying that Google’s entire operations and future earnings are worth the same that Facebook’s entire operations and future earnings are worth. I have owned Google since the day it came public and I plan to hold it for a long time to come. If the stock were to pull back another 10-20%, I’d likely start to scale back into some more Google exposure.

Going back to the bubble-blowing bull market discussion — you tell me. Is it a bubble when the policies of the developed world are forcing retirees to risk their money on assets like tech stocks and private equity even as valuations in tech stocks and private equity are up 10X or 100X in the last five years?

Regardless of your answer to that question, you gotta admit those Google guys have done a pretty darn good job in the M&A world.