Continuing our exploration of Google’s future stock behaviour (see earlier installments below), here’s a chart that illustrates the problem facing Google investors: Even the most beloved stocks don’t maintain premium cash-flow multiples forever (Google’s is currently 60X, about two to three times that of other large, growing companies).
What happens instead? Stocks maintain premium multiples until growth trajectories change–at which time the multiples rapidly compress. Because changes in growth trajectories usually aren’t spotted in advance, stocks tend to “overshoot” and then crater, instead of maintaining a flattening upward trajectory.
Case in point? Microsoft, one of the beloved investments of the 1990s. Take a look at MSFT’s all-time chart below and blur your eyes–and you’re looking at the likely future for even a highly successful GOOG. The only question is when that growth trajectory will change. Because unless you’re planning on losing half your investment, you have to get out before it does.