Google, Inc. (GOOG)

NakoQuant (90.01) Submitted: 9/23/07 4:22 AM : Start Price: $373.08 GOOG Score: 16.15

GOOG will beat the S&P for a few reasons:

1) They are the fulcrum in an important, winning market. Internet advertising is growing at a healthy rate, and is likely to continue to do so for quite some time. More importantly, GOOG is the centerpiece of the Internet for many users. They will be able to monetize this in many ways.

2) They are innovative: GOOG spews out products. The relative lack of income from these products is seen as a negative by many. But think of GOOG as a venture capitalist instead, and the importance of this approach becomes clear. Instead of placing a few very expensive bets, they place many cheap bets and then back the winners.

3) Their competitive advantage is difficult to replicate. The competitive advantage is not the website google.com, as many will incorrectly guess. The lasting advantage is Skynet, er, the global supercomputer that powers the google websites. This matters because it makes new products cheap to bring to market (see #2). Doubt it's a real competitive advantage? Compare to MSFT flailing about with live.com, or YHOO's sub-par results from Panama. This is hard stuff, and it takes a long time and a lot of work to get right. GOOG has a 5+ year head start on their competition. As to newcomers, it will take a long time to catch up to GOOG in a meaningful way. One need only look at the failure of YHOO's #2 Panama and the amount of cash and manpower building the #3 MSFT live search to understand this. A startup without the resources of those two companies will have an even harder time competing.

4) While we're on competition, let's examine the top of the field: YHOO and MSFT. YHOO is a wildcard due to the recent reorg. I don't know how they will retool going forward. But the reorg certainly has slowed them even from their prior lackadaisical pace, and GOOG moves fast. Every day counts, and YHOO is not playing to win. MSFT is hampered by a few major things: a) reliance on the Windows operating system, which is not a good choice for data centers, their PR to the contrary notwithstanding; b) a corporate structure which places Office and Windows at the center of the universe and everything else in Siberia. At Microsoft, working on live.com search is somewhat akin to working on MS Bob or Windows ME: there will be no respect and no bonuses for that team. MSFT is a desktop software company, so the Internet cannot be something they succeed at. Here's a concrete example of a decision that's being made right now in Redmond: given that Vista is a fiasco, do we put our A team on fixing Vista (whence our bonuses spring) or live.com search (which is negligible on the bottom line)? Duh.

5) Recruiting. GOOG is in a brainpower business, where the winner will be decided by who has the smartest, hardest-working team. GOOG has been the IT place to work for almost two full crops of college kids now, and there is no sign that this is changing. (Facebook is a competitor here, but they are not big enough yet to matter too much yet.) This logic extends to seasoned professionals, too. The choice for software folks is stark: a) go to GOOG and work on cool stuff on Skynet, er a distributed global supercomputer; b) go to YHOO and flail around with no clear strategy at the #2; c) go to MSFT and fix bugs in the 10-year-old OS or Office. GOOG will get the A students every time over their major competitors (other A students will go to startups, but the point is they are not going to major GOOG competitors).

6) New products. Don't forget that GOOG is a moving target. Take a look back at MSFT (in the glory days, not the shell of its former self that it is today). MSFT basically had DOS through the 80s. It took years before they added Windows and Office to their serious product mix. Along the way, they made a bunch of cash selling programming languages and stuff like Multiplan, but their product/revenue doesn't mix look today anything today like it did even back in 1994, much less 1984. Their position as fulcrum of the desktop PC revolution, and their ability to recruit the best and brightest put them in a unique position to detect and capitalize on new product opportunities. GOOG is like MSFT in 1989 or so. (Remember, MSFT's top-selling products today had not yet been invented then.) GOOG is also a moving target, and in 10 years their product/revenue mix will likely look different. And they are the fulcrum of the Internet revolution. More successful products are almost a foregone conclusion.

Report this Post Replies: 9 | Reply