Google, Inc. (GOOG)

Google is the best search engine on the planet. I would say at a p/e of 34 or so, it is fairly valued. However, I will also say that internet advertising growth is scheduled to be 5-15% for the next 5-10 years, and less money goes to newspapers and tv and more goes to the internet. That means more growth to Google. Many of the Google's criticisms are unfounded, in my opinion. "Low barriers to entry" - this is false. To be a top search engine, you need a lot of computers and a lot of good people. "Anyone can make a search engine" - sure, but will it be as good as google's? "Click fraud xyz" - the reason google dropped purportedly is due to a lowering of clicks in january due to correction of click fraud. No company is better equipped to handle click fraud than Google. "Overvalued" - while google isn't growing at 60% due to scale, they could easily grow 20-30% revenues in the next 5 years, even with a recession, which makes them undervalued. If google grows at 10-15%, then they are right about where they should be.

There is one criticism of google I agree with - share dilution. As a google shareholder, I absolutely hate the dilution. I wish Brin, Page, and Schmidt would just take a salary, but they don't, I believe mostly because they save on taxes through their option plans. Even still, the dilution isn't enough to knock the stock down significantly. Google is poised for growth and it's p/e has never been cheaper. A buy at 460 or less.

Okay -- seriously. The company is priced to perfection on a mythical presumption of growth 4-5 years from now that may never materialize. It'd be worth looking at around 1/2 its current price, and perhaps at 1/4 its current price it might be considered value territory.

Thanks to the huge hype potential and the old saying "The market can stay irrational longer than you can stay solvent", I'm not shorting this company in real life. But in CAPS, I'll take a shot at underperform.

GOOG still has a lot of way to fall. It's a single trick pony which has been surviving too long on the collective stupidity of advertisers. Think about it...

1. How many times have you actually bought stuff after clicking on a 'Ads by Google' link on a third party website? How many of the websites that you visit explicitly ask you to support them by visiting their sponsors?

2. How much money do you actually spend on stuff that you use Google to search suppliers for?

3. When it comes to expensive high margin stuff (like a car or HDTV) do you rely upon Google to find the supplier for you or do you take a specialist publication?

4. How many suppliers that you do business with have you heard exclusively from Google and not from other sources like TV , other websites?

Getting other income streams other than search is an expensive proposition because...

1. Google is not good at that. It hasn't succeeded even once in monetizing any of it's other products / sevices.

2. There are other nimble players out there which can beat Google. Google might not have the power of it's high flying stock or it's cash reserves to finance too many of these acquisitions.

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.

Google is a giant now for a reason. The next 10-20 years will be dictated by information. Google is a massive entity that has a prime goal of organizing and delivering any information people will think of want/need. They began construction on the largest information storage facility in history, and I have a strong feeling that in a couple of years, Google will house just about every bit of data that exists in the interent on it's own machines, which will be superpowerful at that... and be able to advertise, deliver, and exceed the scope of what everyone thought was possible. I see this stock hitting $1000 by 2010. I wonder if they'll eventually open their own private college.

There are a lot of Google naysayers out there because it's the hottest company around these days. But I think anyone who tells you not to buy Google is crazy. People say it's overvalued. According to the S&P, Google's fair value today is $533. Its P/E is around 30, which is much lower than it has been in years, and its 5yr sales and EPS growth rates are in the 60's, which puts its PEG below .5. The company has no debt and obscene amounts of cash. Don't believe the naysayers. Buy Google.

I bought in (with real money) on Nov. 12, 2008 when the stock was $293.54. But it has been over $700 and can, I believe, go higher. The recession has beaten Google's stock down but hasn't dimmed the company's prospects. I plan to ride it as high as it goes and to buy more on dips.

Don't be stupid.

As good as Google is, I just find it hard to imagine how a $100B+ market cap company can grow into a 50+ trailing P/E valuation.

Long-term, GOOG is a sure winner in my view. But I believe that the next few months hold peril. The kind of ROI-driven advertising that GOOG offers will be the last thing that will be cut in a downturn - but it will be cut. For this reason I believe they'll have very respectable earnings in Q4 - particularly compared to others in their space. This will likely spread a sense that "GOOG is different" - as indeed it is to some extent, leading to raised expectations & perhaps a false sense of security. But GOOG is not *so* different that its business will be unaffected next year, as the downturn truly begins to sink in. Smart, solvent companies that can spend $1 on GOOG advertising and get $1.02 back in margin will continue to soak up all the performing advertising that they can. But as all manner of buyers (consumers & B2B buyers alike use GOOG to aid countless buying decisions) start pulling back, the price that can rationally be spent for given keywords will inevitably start to drop. Meanwhile some players (e.g. startups buying up traffic to spur growth) will vanish from the scene altogether. The result, I believe, will be surprisingly disappointing earnings in Q1 or Q2 - this after Q3 & Q4 of this year have set unsustainable expectations. The ensuing surprise & disappointment could result in a really serious market correction - I won''t be at all surprised to see the price start with a "1". But when that happens - load the boats. Because GOOG really IS different - and just as its type of advertising is the last thing that will be cut, it will be the first thing that will be restarted as the economy regathers its wits. I could see this stock quadrupling or better in relatively short order after things turn around ... but while I'm confident that it will see $400 again, I'm equally confident that it will see $200 and less before that.

Besides the ever growing Pay Per Click business model, Google will eventually open up a Pay per call model (google both these items to learn about them). Pay Per Call is still a very lucrative industry and is expected to grow incredibly over the next five to ten years (google search will lead you to this information as well, as would yahoo or microsoft or whatever search you use, but i'm making a pseudo-subliminal point by saying 'google it'.)

Beyond advertising, Google's dark horse will be cloud computing in my opinion. It will save companies thousands upon thousands of dollars in that they wont have to purchase on site storage of information, it is stored elsewhere. Computer security can also be cut back. Network administration can also be cut back. All this money that will be saved can now be thrown at various other optimizations (or just added to a bottom line). Cloud computing is Google's oft misunderstood, nary a mentioned monster. Its most recent deal with IBM will show this as a rapidly growing income stream.

With Cloud computing, the bearish sentiment on the possible failures of online advertising will quickly have to brainstorm new critiques of what will become a vast lucrative market.

What about Google's Android? It seems a fight may be brewing with Verizon and the FCC over definition of terms, but if the OS is as easy to ingest as google's website itself, I can only see upward motion in its future.

How about the monetization of YouTube? This is possibly the trickiest area for Google. And perhaps this is what is slumping its performance as everyone demands immediate gratification of information regarding income, yet look at Q1's earnings and the market's reaction: That seemed to satisfy a considerable amount of people and still did not include YouTube as one its huge sources of income, I expect the same for the year.

Google Apps: Its basic tools are free. Its easy to use. It eliminates the time of sending documents to people making them accessible to many without the worries of loss of data and many other problems associated with software based information processors. Yet there is a premium Google Apps, and what does Google Apps utilize? Surprise, cloud computing again. Once people understand cloud computing, they will appreciate its benefits.

Google is in a huge "speculative bubble" right now. Although an OS in underway, Microsoft's Bing will erode at Google's dominance in the search engine category. While I believe that Google is a solid company, the P/E ratio, especially with forecast smaller 2009 earnings, is extremely high.

Ridiculously overvalued. Let's compare the stock to Yahoo.

1. Yahoo has a higher net income than Google.
2. Yahoo has a higher free cash flow than Google.
3. Yahoo is predicted to grow at 26.4% by analysts. Google by 30%

At the very worst the valuations should at least be comparable and I would argue in Yahoo's favor. But look at the market capitalization.

Yahoo: 41.13 billion
Google: 116.68 billion

Google trades at 2.8 times Yahoo's value?? I don't buy it.

Using a DCF valuation I project the companies would have to grow at these projected 5 year growth rates.

Yahoo: 23%
Google: 51%

If this were to occur, Yahoo's valuation would be $115.79 billion (Less than Google today.) If my projections are true, what would Google's valuation be? $915.97 billion. Which I believe would be the most valuable company in history by a long shot. Wasn't MSFT at its peak only valued at 1/2 a trillion? We're going to value Google at $100 billion shy of the Big T?

In short, Google can not positively sustain its valuation. And the only people who...might as well be clicking "I'm Feeling Lucky" on the Google page.

This could be huge, The Wall Street Journal reported that Yahoo! Inc. is looking to turn over Web search advertising to Google Inc. following a successful test using Google's service to deliver ads alongside its Web search results. The possible partnership with Google would be part of a bid by Yahoo to forge a three-way deal where Yahoo would merge with Time Warner Inc AOL in return for Time Warner taking a stake in Yahoo. Google and Yahoo are considering how to ward off antitrust challenges. A potential deal could involve limiting the ties to specific groups of search queries or regions.

After my short-term call on FFEX, I'm now entertaning the idea of becoming a serious trader -- ya know, on CAPS, with no money. After the upgrade on GOOG this morning, I think the market will rally behind this stock over the next couple months. GOOG has been stuck between $375-$425 for some time. In the end, I think the only thing stopping Google will be the Justice Department, and I don't expect hints of that issue to surface for a few years. But for now, I'm just making a short-term call on GOOG. . we're headed to $450.

Google is showing with 'fad' buys like uTube that can not create growth internally that sustains its high PE. Advertising does need a market-maker and Googles success/failure rests on it's ability to become that market-maker across the media empire. But that entrenched empire won't give power over easily or quickly. I think Google's purchase of uTube tells the tell of their own feeling of vulnerability at the top -- 'better do this before someone else does' instead of 'this makes really good business sense.' That's a sure sign of underlying weakness.

This company has GREAT written all over it. But at over $100 billion market capitalization, this company is priced to perfection. Pardon my rough calculations and comparisons, but Microsoft boasts $13 billion in free cash flows and spots a market cap of $250 billion. GOOG generates 1/10th of that ($1.4 billion in FCF) yet spots almost half of the market cap of MSFT. Yes GOOG may be growing at a faster rate, but current valuation implies the market expects FCF to grow by an average of 30% going forward.

That means to make the stock an interesting investment opportunity, the company will have to “outgrow� that 30%. Now that’s like telling Carl Lewis to run the 100M in 9.7 seconds, because he did his last run in 9.86 seconds (his actual record). And if the market had any say, 9.9 seconds will be a “major� disappointment.

- hype overvalued (compete with microsoft? huh? in what world? more searches, yes, but search is hardly microsoft's priority)
- industry overvalued (compare to yahoo, not msft)
- fundamentally overvalued (compare market cap, cash flows, p/e, book value... ridiculous growth expectations)

dont get me wrong. i love google. also.. i loved hotbot. i loved altavista. i loved lycos, webcrawler, aliweb, et al. they all had their time. but search engines come and go (save yahoo just being minimized). google may go away very quickly, or it may survive like yahoo has, and just lose some relevance, but neither result, nor even the status quo, validates this price. this isn't some mystery, most everyone knows this. it's just a matter of everyone waiting for the bad news (rather, not good enough news) so they can bail at the right time. last one out is a rotten egg!

I think Google's best years are behind it. Their core innovation was NOT search, it was AdWords. Search was just a convinient place to deploy AdWords. I don't seen this innovation being extensible to any other advertising market, and think metrics will eventually show advertisers that CPC advertising isn't as cost effective as they thought, causing a decrease in CPC prices and accordingly in Google revenues.

I do not believe the "messy marriage" between MSFT and YHOO will pose any significant thread to the leadership of GOOG in the next couple of years, eventually, maybe and depends on how they execute. The recession (if any) will go away soon.