Henry Blodget on Google
It is in this month's Fortune.Terrific article (Blodget can write -- case in point, that Real Estate piece he did recently for New York Magazine) on Google's astronomical rise to the $300 range; last week analysts raised their targets to $350 a share.
Did you say $350 a share?
Wait, something has to be wrong.
Blodget's thesis is that the Google phenomenon reminds Wall Street's denizens of the late 90s. You remember the 90's, right?
By the end of the decade those who had moved to cash or clung to "safe" stocks had watched as neighbors got rich. The market had become a fantastic wealth-creation machine. And in the middle of everything was an exciting new technology, the Internet, with the new jobs, fortunes, and success stories that have forever made up the American dream.Google, at least on paper, does look expensive. The stock trades at a scary 100-plus times the previous 12 months' earnings.
But that is not the end of the story.
Google is imbricated smack dab in the middle of a 10 Billion dollar industry called online advertising.
Google virtually owns it.
Traditional mega companies are re-locating their advertising dollars and Google's reaping all the benefits. Consider this opening statement from a recent article in The Economist
This year the combined advertising revenues of Google and Yahoo! will rival the combined prime-time ad revenues of America’s three big television networks, ABC, CBS and NBC, predicts Advertising Age. It will, says the trade magazine, represent a “watershed moment” in the evolution of the internet as an advertising medium. A 30-second prime-time TV ad was once considered the most effective—and the most expensive—form of advertising. But that was before the internet got going.Google's miraculous task is to assemble and combine relevant audiences with relevant ads. No one does it better.
That's why Google can fetch such a nosebleed valuation.
If that wasn't enough, as Blodget concludes:
...the most amazing aspect of the Google phenomenon is not the stock price, which is expensive but not outrageous (40 times this year's free cash flow, in my estimation, vs. about 30 for Yahoo and 20 for a mature media company like Viacom). The most amazing aspect is the company's performance. Only seven years old, Google is generating about a third as much cash as media behemoth Time Warner (FORTUNE's parent company), and its single online property is sucking advertising dollars away from almost every traditional media company.Google, whose aim is "to organize the world's information and make it universally acceptable" is the stock to own, albeit a pricey one.
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