Insightful analysis and commentary for the US and global equity investor
Contributors: Douglas McIntyre Jon C. Ogg

Previous Posts

Friday, September 29, 2006

Is Google A $200 Stock That Trades At $400?

Google had net income of $721 million last quarter, its best quarter of the last four. At eBay, the best quarterly number over that same period was $279 million. Of course, the holidays make their business more seasonal. At Yahoo! the best of the last four Qs was net income of $632 million. At Amazon, the number was $199 million.

Google’s market cap is about $124 billion now. Yahoo!’s runs about $35 billion. eBay weighs in at $40 billion. Amazon at $13 billion. So, Google is worth 41% more than the other three combined.

Of course, Google’s revenue almost doubled last year, to $6.1 billion. At Yahoo! revenue has not doubled since 2004, when it was up 120%. eBay almost doubled revenue in 2003, and came close again in 2004. Amazon has not grown that fast since 2000.

Obviously, Google gets a huge market premium for its spectacular growth being in a more recent period than the rest of the companies. Based primarily on anticipation of future increases in revenue and operating income, Google trades at about 15 times sales. At Yahoo!, the number is 5.7 times. At Amazon, the number is only 1.5 times, but their big growth year was six years ago. The eBay ratio of sales to market cap is 7.3 times.

Virtually all of Google’s revenue comes from key word advertising. Internet advertising has been growth at an extremely rapid rate, but a recent study from the Internet Advertising Bureau says it is slowing. While US internet advertising was up 37% in the first half of 2006 compared to the same period in 2005, it only grew by 5.5% from Q1 2006 to Q2.

Predicting whether internet ad revenue growth will continue to slow is impossible. Obviously Yahoo! has suffered recently from the perception that some of its major ad categories are not doing well. It is too early to tell whether this will spill over into other internet companies.

One thing is certain. When Wall St. gets a whiff of slower growth, stock prices stumble. Yahoo! is a case in point. This year its price has gone from over $43 to $25. In late 2004, eBay traded at over $58. Today, it changes hands at $26.

Google’s day is coming. In the June quarter, revenue jumped to $2.456 billion from $1.385 billion in the same quarter a year ago. Another double. But, with overall web ad revenue growing at less than 40%, Google is too big to gain enough market share to overcome the overall trend.

And, when the trend is not your friend, eBay and Yahoo! would indicate that a company’s market cap can fall by half.

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

Powered by Blogger