A VC« New Category: stocks | Main | No Nuggets Today »
Pondering GOOG
The quarter that Google (GOOG) just announced was very impressive. This is starting to become a quarterly occurence. I read the numbers, shake my head, and wonder how long they can keep this up.
Last quarter, I saw the numbers and wrote the Oh My post, which included:
We are witnessing a business that is approaching $10bn in annualized revenues growing at 80% year over year. And we are looking at a business with operating margins of almost 50%.
Well it just gets better. This quarter, revenues were up 20% quarter over quarter to almost $2.5bn. Operating profits were close to $1bn and net income was almost $750mm. Here's the transcript of the earnings call at Seeking Alpha.
So Google is generating about $4bn per year in pre-tax cash flow. If you call that EBITDA, and it's close enough for a back of the envelope number, you'd say that GOOG trades at about 30x this year's EBITDA. That's almost twice the multiple that Yahoo! (YHOO) trades at currently.
I bought some YHOO earlier this week. I am not so sure about GOOG. Because I don't know how much longer GOOG can put up these kinds of numbers.
I hear that many search keywords are getting bid up to the point where the CPAs they generate are approaching the marketers allowables. Does that mean that keyword prices can't go up much more?
And I hear that searches are growing at about the same rate as the Internet as a whole meaning search still has nice growth but not 25% quarter over quarter.
And I hear that marketers are frustrated that they can't effectively buy any more search.
And I hear that new forms of banner ad targeting are giving marketers a way to generate CPAs from banners that are approaching and at times exceeding search CPAs.
So I wonder how much longer this search driven revenue wave will last. And as great as Google is, they are completely and totally dependent on search and contextual advertising revenues. According to the transcript, Google.com was $1.4bn and I assume Adsense was at least $600mm, so that means that at least $2bn of the $2.4bn of revenue comes from their two big juggernauts. If that slows, Google slows. At least until some of their other iniatives start producing big numbers, if they ever do.
This post is not really about me making a point. It's about me asking these questions. If you have any answers, please post them in the comments. I am sure I am not the only one who wants to know.
Comments (10) | Posted July 21, 2006 in stocks , Venture Capital and Technology
Comments
Hi Fred, Google plans to get into banner advertising, not on their sites but on other's sites. So to the extent CPA's for banner advertising are improving, Google may have a yet as untapped source of revenue. Also, Google's payment system helps them track a web user's click on an ad, to purchase of a product. I'd imagine that an advertiser would be willing to potentially put more advertising dollars down if they knew the actual sales dollars they generate from such ad dollars. That's something that's not really been done efficiently before. Clearly countering all this pro-Google stuff is Microsoft and Yahoo's development of ad systems that may prove competitive. Google's CEO is quoted as saying that he thinks the entry of such new systems will increase the pricing on all such systems, using a multiple retailers of a type in a strip mall analogy, but I'm not sure that really holds.
Posted by: Ranjit Mathoda | Jul 21, 2006 4:03:34 PM
Last day I was chating on GoogleTalk with a friend about our trip in Cambodia. We were really eager to find a confortable hotel near Angkor with "West Standards". When I was back on my Gmail Inbox page I just noticed a small and discrete text ad about Cambodia: that was just what I was looking for: I solved my problem and the advertiser got a customer. E-Commerce and search engine are becoming such a mess: have you ever tried to query "Hotel Italy" in yahoo or google? Standard result are a jungle and you will probably find something useful only at 8th or 9th page of results (I usually skip the first 3-4 pages for certain kind of queried).
Google advertising system is becoming a win-win system for both end-user, advertiser and google itself. This is an incredible asset that Google can further leverage on: I think that Adsense is working very well when it comes to English, but is not so precise when it deals with Italian. There's still a lot of room for improovement in that area.
Google has hired the smartest geek in the world, has a nice organization and 10 bn of cash pile. I think it has all the meen to further leverage that asset and a premium on YHOO is more than justifed.
On the other hand, YouTube is a glaringly obvious example of how Google can fail in that task. When Google launched Video Google the financial world was so focused on Google becoming a media company, that nobody saw a small start-up coming from behing and building a way from distributing content far more effective that google video.
I happened once with video content, it could happen again with Ajax web-based application or, why not, pagerank. 14 years ago Altavista.com was a brand so strong that any advirtised wanted a space there. It just took two geek to slash is worth to almost nothing.
And that is not completly priced in the 30x multiple (nor in the 15x of yahoo....).
Sorry for my English... I'm in a hurry and I'm Italian ;-)
Posted by: Daniele Della Seta | Jul 21, 2006 4:46:28 PM
Hi Fred -- I'm no financial expert, and I know there are lots of people that analyze stocks -- that being said, GOOG is not a normal stock or company. No real analysis works for them, they are truly the exception to the rule - so where is the stock going, who knows.
I remember AOL in the early days, the only difference is, AOL kept splitting the stock to keep it a price "range" - but it was going up so much and so often, that splits happened almost every quarter.
The question is how long will GOOG defy gravity.
Posted by: Arnie McKinnis | Jul 21, 2006 5:18:38 PM
Our clients are seeing display CPAs approach search in some cases. Search prices on obvious words continue to rise and everyone's getting better at finding longer tail keywords, so the easy returns from search are getting smaller and more difficult. At the same time, some of the barriers that prevent people from buying banners are getting lower. As dollars get easier and easier to move across channels (which Google will probably continue to enable), the ROIs will continue to move much closer.
Posted by: John Rodkin | Jul 21, 2006 5:31:36 PM
The easily measured ROIs from search (or banners, or any other form of online advertising) are the low hanging fruit and will continue to get picked until the lower branches are bear. The real untapped growth is in online spending for "difficult to measure" offline actions. Because of the lack of precision in ROI measurement, the traditional arbitrageurs have stayed away. And I'm guessing that in like most tradable markets, equilibrium of value (i.e. search to allowables) is mostly driven by arbitrageurs.
When the marketers for the difficult to measure offline actions, or a new breed of arbitrageurs that can measure these ROIs more precisely, step up their spending, GOOG and others could continue to see rapid growth. This assumes that they will step up their spending, but I think its a safe assumption because when there is low hanging fruit there is usually a lot bigger fruits higher up.
Posted by: Dan Malven | Jul 21, 2006 11:52:31 PM
Arnie, (read his comment above)
Saying that GOOG isn't a normal stock reminds me of what was said during the it bubble. "Normal valuation doesn't work anymore... we need to count clicks, hits, whatever"...
Fundamental valuation works - period. If GOOG can't deliver (I'm not saying whether they can or can't--I am as puzzled as Fred is about these numbers), they will tank. There is no such things as special valuation rules.
My fear is that GOOG is a Dutch tulip case all over again. I am more keen on the YHOO trade that Fred and Pincus are in on.
Posted by: Bjorn Ruwald | Jul 22, 2006 5:21:09 AM
Thank you very much from www.argticaret.com Turkey
Posted by: argplywood | Jul 22, 2006 9:33:34 AM
Fred,
Why is Google trading at 30 X EBITDA?
Perhaps it's a bit bloated, but for all the reasons you outline (free cash flow, growth track record, profit margins, consistently outperforming expectations) I think a better question is why isn't Yahoo valued with a similar yardstick? Their search technology is admittedly not as robust, and they took a longer time getting Overture integrated into pre-existing systems than they should have (resulting in unneccessary post-acquisition customer attrition). However, Yahoo is far better at merchandising than Google. And online advertising is in its infancy, with more than one player inevitably benefitting.
Just think about how these dots connect: there's a decent % of the $60B in TV annual ad spend that's sitting on the sidelines right now (with P&G, CocaCola and AOL all resisting commitments for the UpFronts). To me, this indicates that Yahoo's forward-looking opportunities do not seem nearly as bleak as this GOOG comparison would indicate. Nor do Microsoft AdCenter's, for that matter. In fact, accdg to AdAge, MSN's Joanne Bradford recently stated publicly that she had to walk away from a $100million ad buy because they simply did not have the inventory.
That's totally amazing, and demonstrates to me that interactive is about to exceed the 10% of total annual ad spend --the mark that interests most media buyers and traditional agencies, and makes the category legit.
Regarding your thoughts on allowables:
"I hear that many search keywords are getting bid up to the point where the CPAs they generate are approaching the marketers allowables. Does that mean that keyword prices can't go up much more?"
I interpret this a slightly different way: the metrics need to evolve, to accomodate the less savvy marketer. Meaning, the vehicle that owns the "pay-per-transaction" media buy method --a more sophisticated form of affiliate-marketing, where the search partner earns the commission-- will win the game. Think about from their customer's perspective for a minute: essentially, if Urchin/Google Analytics could be as simple as pay-per-transaction it would effectively eliminate the need for an agency, and automatically increase marketer's profit margins. Think how simple that makes everything.
Words like "killer app" or "category killer" were pretty much defined by this type of customer benefit, from my POV.
Posted by: Megan Cunningham | Jul 22, 2006 5:18:57 PM
I wish I had a buck for every time I've introduced someone to Adwords this summer; very few small companies have even heard of Adwords. Plus many larger companies have only begun to dabble with online advertising. There's tons of growth available to either company and I don't think that either stock is a bad bet.
However, I like Yahoo because it's cheaper, does a better job with impression-based advertising, is less likely to be hit with a huge fraud lawsuit, and has more mature leaders that don't worry about the configuration of their plane.
BTW - excellent post by Megan above.
Posted by: Rick | Jul 24, 2006 3:18:47 PM
http://www.uinzz.info/
Posted by: kas | Nov 19, 2006 8:50:39 PM
Main RSS Feed of All Posts
VC and Technology Posts Only
