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Tuesday, September 19, 2006

Google Flies Too Close To The Sun (GOOG)(YHOO)

Since August 14, Google’s stock has risen from $370 to $415. The stock now trades at over 15 times sales. By contrast, the ratio of market cap to sales at Yahoo! is 6.8 times.

Google is still a business that relies almost exclusively on one revenue stream, the text ads that go with its search results. Google may have promising businesses in GMail, Google Video, and Google Earth, but none of these and another dozen initiatives that the company has started have made any money.

Some analysts have become concerned about the search giant’s valuation. Morningstar has predicted that the company’s growth rate will fall from the 40% where it stands today to under 20% by 2010. The research firm also believes that Google’s margins will be pushed down by rising costs of employees and R&D. It is inconceivable that the company’s revenue can keep doubling as it has from 2003 to 2004 and 2004 to 2005.

At look at the Yahoo!Finance history of analyst opinions on Google shows that the stock has been downgraded as often as it has been upgraded, so the market’s struggle over where the stock is going has already begun.

Any company that trades at 15x sales only needs one week quarter to take a significant haircut. That will happen to Google. It is just a question of when.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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