Putting a Price on a Company's Vision

 | Jun 03, 2014 | 11:00 AM EDT  | Comments
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Stock quotes in this article:

googl

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tsla

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scty

I remember when Google (GOOGL) went public. A stock trading at 35x earnings for a search engine? I don't get it. It's just a search engine. 

While nobody was looking, the search engine launched a bunch of satellites into space and drove cars everywhere and mapped out every corner of the earth, and then gave away all that information for free. Some search engine!

The Adsense business is fantastically profitable and throws off an obscene amount of cash that Google can use on research and development. R&D is something you don't hear much about these days, unless you're talking about Gillette spending two years making incremental improvements to a razor. But some companies out there, Google being the most noteworthy, focus their research and development on things that will change the course of civilization. Elon Musk is making electric cars at Tesla Motors (TSLA), building rockets that can go up and come down and dreaming up the Hyperloop. Google is building self-driving cars, among other things.

I think it was Peter Thiel who said, "We wanted flying cars, we got 140 characters." And that has been the knock on Silicon Valley all these years, that it is, figuratively speaking, making incremental improvements to the razor. Tesla has proved a notable exception, as Elon Musk focuses on achievements in material science.

These world-changing inventions aren't coming from venture-capital-backed startups; they are coming from the internal R&D departments of major tech companies. Google has spent $50 million (so far) on self-driving cars. And these inventions are also not coming from government. Government is now officially out of the space business, after proving unable to put anything into space for less than a few billion dollars. SpaceX might get us to Mars in our lifetime, for a lot less.

So when you ask what Google is worth, it's a really had question, because if you take all the sell-side analysts in the world and have them do a discounted cash flow analysis on the Adsense business, without taking into account these self-driving cars that might make it a trillion dollars, you may grossly underestimate the value of the company. Same with Tesla. You can work into some value of the company on the basis of the pro forma of the number of cars it will sell, but there's more than that. There is also the incredible synergy with battery production and SolarCity's (SCTY) solar panels.

From a market standpoint, this is not the time to be thinking about growth (I for one am buying beaten-up high dividend payers), but if I start talking about growth, I can't stop. I read an article about six months ago that said part of Google's R&D budget also encompasses medicine. What are they trying to do, come up with medication for gout? Au contraire. They are trying to end death.

Google will probably fall short of that goal, but it's noteworthy that someone is trying. Think about this -- all the money that has been spent and donated on cancer research, and we still haven't conquered it. But a company like Google hires the smartest people in the world and has them set about solving intractable problems. Just for fun.

It's a pretty incredible time to be alive. Whenever I think about stuff like this, I want to run out and buy growth stocks. But not now. Now is not the time.

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