Stocks today act like tech bubble in Y2K? Part 1

Many articles and news have compared today's market to the tech bubble in about 8 years ago. Well no two markets are exactly the same, they may look alike, but I think it's too easy to come up with such conclusion that they are alike. Let me compare something between today and 8 years ago.

Google did not go public yet in 2000, its net income is roughly $3.5 billion per year in 2007. This kind of net income is like Microsoft in 1997.

In 1997, Microsoft traded between a P/E of 31 to 57. As at end of today, with Google sitting at $703 per share, it's P/E is about 55. Highest price of Microsoft in 1997 was $37.75. You know the peak of tech bubble was in 2000, where Microsoft reached $120 before it came back down (Microsoft splitted 2 to 1 once since then, so the highest now should be $60.). So Google sitting at P/E of 55 is still in Microsoft 1997's range.

Microsoft's net income grew from about $3.44 billion in 1997 to $9.42 billion in 2000, a 2.74 times. Its stock went up from highest to highest 3.2 times. I guess if I say if Google can grow its net income in this speed and its price should go up by 3 times to $2,100 per share ($6,000 billion in market value) sounds crazy to many people, but unless you see that kind of price movement in 3 years a new tech bubble may not be true.

Let's look at this issue in another way. We fast forward from 1997 to today. Microsoft reported annual earnings of $14.1 billion ending June 30, 2007, it's now at $346.7 billion in market value. I know everyone agrees Google can grow faster than Microsoft like China can grow faster than U.S., but still you need time to pick up the difference, which is a 4 times difference in net income.

So if Microsoft producing $14.1 billion net income and is (only) worth $346.7 billion in market value. While Google has (only) $3.5 billion net income and is now worth $219.5 billion in market value. I think people are betting on Google can make up the difference very fast, otherwise, the price of Google seems too high. But unfortunately I don't know if it's too high to worth shorting Google.

Anyway, judging an existing of tech bubble only by comparing Google and Microsoft is not fair.