Friday, March 24, 2006

Welcome to the Party, Google: What Next?

You know you're "the money" when you can go public, scare the living daylights out of one of the most powerful companies on the planet (Microsoft), and 19 months later, land a spot in the venerable S+P 500 list.

Google's inclusion in the major benchmark (finalized on Thursday) comes about 19 months after the company went public at $85 a share in August 2004. Google is the archetypal volatile growth stock. It soared from its IPO price to an all-time high of $475 on Jan. 12 but dropped to as low as $331 earlier this month.

A stock as young as Google is bound to behave violently when things don't go its way. As for us, we still can't decide if Google is a stock we want to parent for the long term or rent out for a couple of more quarters. But one thing is for sure: Google better start figuring out how to protect is technology. Barriers to entry in the search arena are low and without its riveting brand equity and myriad content partners, we don't think Google would ever maintain the market value it now does. Right now, investors are rewarding Google with a market cap 8 times the size of GM. We'd like to see Google stop launching so many free services, most of which exist in a better form somewhere else. G-Mail and Google Finance, for instance -- you'll be hard pressed to find someone who prefers those platforms over MSN's Hotmail and Yahoo! Finance, respectively.

We suggest that investors wait for a steep discount to fair value before they load up on Google shares. If Google falls under $300, think long and hard. If it falls beneath $260, consider it a gift and act quickly. Google's revenue has grown 190% per year since 2001. Future growth should be driven by online advertising, which will sustain above-average returns on invested capital (ROIC) as well as 30%+ operating margins. Google could be a bit more transparent with Street analysts/the investment community, but other than that, you'd be buying one heck of a management team.

With $8B in cash and no debt, Google is unquestionably in great financial health. Going forward, we hope Google focuses on maintaining its leadership position via a good mix of organic and acquistive growth. Because as Google's competitors improve their own search technology, Google's technical advantage will inevitably shrink. If that shrinks, Google's market cap will follow suit and trust us, it ain't going to be pretty. Google could sink under its own weight.

About Us | In the News | Management | Contact Us | Archive | Premium Membership | Terms of Use | Privacy Policy | Careers | FAQ

All quotes are 15 minutes delayed. Copyright © 2006 by Catablast! Media Group LLC, part of the SeekingAlpha network. Web Design by Synexio Systems. All Rights Reserved.