More Expensive Than Google
by Dr. Steve Sjuggerud
January 16, 2006
You might not think it’s possible, but it is…
At over $450 a share, Google (GOOG) grabs all the headlines as the world’s most overpriced big stock. But there is another large stock out there, in a similar business, that’s even more expensive than Google…
And I have a great way to make some money from this one.
This stock is not only more expensive than Google on a price-to-book value basis, it’s actually twice as expensive as eBay (EBAY) and Yahoo! (YHOO).
Even more ridiculous to me, this stock is trading at over ten times sales. At ten times sales, a company would have to pay out every penny of revenue for ten years for the shareholders just to break even. At that price, the folks owning these shares have clearly suspended their belief in reality.
I plan on traveling to India next month. I plan on visiting where this company is headquartered, Bangalore, to see what all the hubbub is about.
Can this company possibly live up to the hype of being more expensive than Google? I really don’t think so…
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People obviously think that this stock – India’s outsourcing specialist Infosys (INFY) – is invincible. They believe it can't fall. Yet the stock actually fell by over 90% in just 18 months not that long ago... from March 2000 to September 2001. It can definitely fall.
Why could anyone even imagine paying 10 times sales or more for a stock? I can’t see it, and I wouldn’t do it. But here’s an example of one that people are willing to buy… eBay.
eBay has a business without much competition. But is that worth 15 times sales? That’s what the stock currently sells for. I can at least I can see eBay's business "moat” - its lack of competition. But I’m not a buyer of eBay stock.
When it comes to Infosys, I simply don't see the business "moat" that makes Infosys twice as expensive as eBay on a price-to-book value basis – it makes it more expensive than the world’s most expensive stocks. Take a look:
World’s Most Expensive Major Stocks
(price-to-book value shown) |
Company |
Ticker |
Share Price |
Market Cap
($ billions) |
Price-to-book value |
Google |
GOOG |
$463 |
$137 |
14.5 |
Genentech |
DNA |
$86 |
$91 |
11.8 |
Qualcomm |
QCOM |
$49 |
$79 |
7.2 |
eBay |
EBAY |
$45 |
$63 |
7.6 |
Yahoo! |
YHOO |
$40 |
$57 |
7.7 |
Infosys |
INFY |
$74 |
$20 |
16.8 |
As you can see, on a price-to-book value basis, Infosys is the most expensive of all.
Infosys is in the outsourcing business. If you're a big business and you want to do something on computers cheaper than you can in the U.S., you call Infosys. Infosys is the best, and that's why its shares are so expensive. However, Infosys is no eBay... it has real competition.
Infosys faces tough competition locally, including NYSE-traded Wipro (WIT). It also faces competition from outsiders in India... outsiders like IBM and Accenture (IBM already has 25,000 employees in India). Also, India faces price competition from the Philippines and Eastern Europe, where there are skilled English speakers willing to do the same jobs inexpensively.
In sum, Infosys has local competition... It has foreign competition locally (like IBM)... And it has competition from other countries as well. Where's the eBay-like moat for Infosys that makes it worth 10+ times sales? I don't see it.
It’s time to bet against Infosys now…
Readers of my service Sjuggerud Confidential have already placed their bets. But DailyWealth readers are lucky here… the share price is in about the same place as when I recommended it to my Sjuggerud Confidential subscribers.
I think now is still a good time to bet against the company. Earlier this week, shares of Infosys tanked after it announced earnings that any other company would be proud of. Said simply, when good results turn out to be bad for the stock price, it’s time to get out of the stock… or even go short.
Here’s what I told my Sjuggerud Confidential readers a few months ago. The advice still stands for you today:
“Short sell Infosys now, and cover your short at $40 a share. Set a MENTAL trailing stop of 15%, or $83 a share… Ideally we'll close out our position at $40, within 12 months, for a profit of about 45% in a relatively short period of time.”
Just in case this trade moves against us, I added:
“If Infosys closes a day above $78 a share, do NOT add to your position, as this is a negative sign. If it rises above $83, cut your loss and get out.”
Let me be clear about one thing… This is not a bet against India, or outsourcing, or any of that.
It’s simply a bet against a wildly overpriced stock that is starting to break down. It’s a bet that this Indian company with competition on all fronts does not deserve to be twice as expensive as eBay.
As for Google? We’ll talk about that tomorrow…
Good investing,
Steve
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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