AlterNet.org has an insightful piece on Google's axiom, "Don't Be Evil," and how the company's values have distinguished them from their competitors.
Side-by-side screenshots show how Google returns relevent results when searching for "hotels," while Yahoo's page is filled with paid advertising. See a Google example here, and Yahoo example here.
"Google is still the best place to get the content you came for, not what marketers want you to see." Click here for an example of a Google search Yahoo-ified (it's in French, but this transcends language -- or you can translate it here).
As the competition intensifies, can Google hold to their core beliefs? "Now that their name is synonymous with web search, their real challenge is staying true to their 'don't be evil' mantra in the face of greater scrutiny." Privacy advocates complain about the inclusion of ads in the new Gmail web email service, and Google has been criticized for preferring "Don't Be Evil" over "How can we be good?"
Says the AlterNet article, "It's my hope that Google sticks to its unabashedly idealistic guns throughout its IPO and beyond. Either way, they're already a success story for everyone who has ever wanted to make a buck without being evil."
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| Google's prospects from a Google user and independent investor |
Google's success due to Don't Be Evil culture - 5/13/2004 11:40:47 AM
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Adwords: $0.05 to $30.00 - 5/13/2004 11:15:29 AM
The Washington Post explains how Google gets 95% of their revenue--by selling context-sensitive ads to web searches and partner websites. Advertisers pay only when a user clicks on their ad, and "those clicks generated about 95 percent of the company's nearly $1 billion in revenue" last year.
The article profiles Gateway's purchase of keywords like "digital camera," which costs 75 cents--a "very efficient marketing program" for Gateway. (Interestingly, the plural "digital cameras" costs $1.08 because people searching the plural are more likely to buy.) The actual price of each ad is determined by a real-time auction, plus a relevance factor--if users aren't clicking your ad when it's displayed, Google will reduce its prominence, no matter how much you're willing to pay. Ads can cost as little as 5 cents or $30 or more per click. The keyword "mesothelioma" has been bid up to $30 or so, since mesothelioma links to lucrative legal or medical services for asbestos victims. Web site partners receive a portion of this revenue when they allow Google to serve ads to their sites and users click through. |
Barron's on Google IPO: "Better than $50 billion" - 5/13/2004 09:02:59 AM
Barron's is a weekly newspaper from Dow Jones which is well known for running negative stories on companies that cause their stocks to plummet. Barron's is very conservative--they're not known for hyping stocks that ultimately crash.
So it's especially meaningful to see Barron's forecast a Google IPO valuation well above most analysts' most optimistic projections. (See article here, requires subscription to WSJ Online.) From the Barron's article: Previous guesses were that Google could go public with a stock-market valuation of $20 billion or even $30 billion. But the actual number could be in the $40 billion to $50 billon range. That's a reflection of both the nature of the auction system Google will use to sell shares, and the company's financial performance, which has been even better than had been rumored....Google is growing rapidly, and producing massive profits. Not only are Google's reported financials very strong--but the strength is actually understated: Google is astonishingly profitable. In the March quarter, it produced pre-tax income of $155.3 million, or just under 40% of revenue. For all of 2003, the figure came to 35.6%. That's a lot more profitable than Yahoo, which in the first quarter reported a 21.2% pre-tax net margin. On the same basis, Microsoft in the March quarter reported a 24.8% margin. Even though this is spectacular performance on its own, if you adjust for the non-cash options expense of $229M in 2003, "pre-tax margin ... jumps to 59%, a level few companies can match." And Barron's points out that Google is using less aggresive revenue accounting than some competitors like Yahoo (see previous post on this). If Google used the same accounting rules as Yahoo, revenue would have been 67% higher in the last quarter. The article says "Google is a cash-generation machine. In the first quarter alone, cash from operating activities totaled more than $200 million." This is a critical difference between Google and the dot-com goldrush of unprofitable companies with negative cash flow. (For an excellent primer on how to value companies using discounted cash-flow techniques, see Valuation: Measuring and Managing the Value of Companies by McKinsey.) Barron's does the "back-of-the-envelope math": "Given Yahoo's P/E, Google's $2 of earnings would get its shares to $170, and a better-than-$50 billion valuation." And the this could be the low end of the range: "$2 in earnings could turn out to be conservative, as it assumes profits flatten for the next three quarters." Almost as an afterthought, the article notes challenges from "determined competitors" Microsoft and Yahoo, and says Google's "growth rate will slow and its margins shrink." And beware of the "game-theory concept called the 'winner's curse,' in which bidders win auctions by over-paying. While Google "could be the next Microsoft -- or the next Netscape," "it would not be surprising to see Google eclipse even the most ambitious forecasts for its initial valuation." |
Is Google really a force for good? - 5/12/2004 01:38:35 AM
[Note: This article was so good I wish I could reprint it here in full without violating copyrights. Instead, I wrote a letter to the editor at the Wall Street Journal, and posted it on my sister site, www.dontbeevil.com. Here's a brief summary--to see the entire article you've got to be a WSJ subscriber, unfortunately.]
The New York Times ripped Google's idealism and "Don't Be Evil" ethic as "embarrassingly naive." But The Wall Street Journal is a believer. In Google's Idealistic IPO, Tim Hanrahan and Jason Fry write that Google is defiant: It scoffed at the idea of quarterly earnings guidance, warned potential investors that it wasn't a conventional company and "we do not intend to become one" and swore that it plans to make high-risk, high-reward bets. The article continues that Google is "idealistic as well as defiant, proudly invoking its mantra of "Don't Be Evil." To the New York Times' cynicism the authors reply, "we giddily disagree." Unlike "all those dead dot-coms that swore to change the world, Google already has." |
Market share statistics - 5/11/2004 06:37:49 PM
The Wall Street Journal published (sub req'd) some statistics on Google's market share. Here are a couple highlights:
1. Google is #1 in Web searches, with a 34.7% share. Yahoo is #2 at 30.0%, and MSN is third at 15.4%. 2. The overall market for paid-search ads is large and growing. In 2002, the market was worth $900M; in 2003, it grew to $2.5B; and 2004 is projected to hit $3.2B. But the growth rate appears to be slowing--more than doubled from 2002 to 2003, but up just 28% in 2004. 3. Of the five big Web players, InterActive, Amazon, eBay, Yahoo and Google, Google has the smallest 2003 revenue ($962M) and the second-smallest profits ($106M). |
More fuel for Google IPO valuation - 5/11/2004 10:09:04 AM
Investor's Business Daily quotes a Goldman Sachs analyst saying the Yahoo's current price is 30% undervalued. The analyst looked at cash flow growth through 2007, and noted that "at $51, Yahoo is trading at 20 times 2005 cash flow estimates yet it's on track to increase its cash flow twice as fast." As of this post, Yahoo shares were up $2.25 or 4.38% to $53.58.
Because most valuation estimates for Google's share offering are based on comparisons with Yahoo, this news may increase Google valuation models. |
Google Agog: Are the Valuations Solid? - 5/11/2004 05:43:14 AM
The Wall Street Journal, in Google Agog: Are the Valuations Solid? attempts to justify a $25B market cap for the Google IPO. While much of the valuation attempts so far have compared Google with other net companies like Yahoo, the article says this is dangerous:
Playing such relative-valuation games can be dangerous, because they assume that the companies being used as benchmarks are also fairly valued. Many investors prefer to use net-present valuation methods, which hold that a company must, in time, return the cash investors have put into it, adjusted for inflation, plus some more for the risk that investors have taken for putting up their money in the first place. In spite of making some very generous assumptions, the article concludes that Google would have to deliver some incredible growth to justify a $25B valuation--a number that is rapidly becoming the low end of other analysts' estimates: For Google to achieve such a growth rate is extremely unlikely, says Jeff Bronchick, chief investment officer at Los Angeles money-management firm Reed Conner Birdwell .... Google's search technology, immensely useful though it may be, is not, as the company pointed out in its registration statement, immune from competition .... the company is not in the sort of happy situation that Microsoft Corp., which achieved a virtual lock on the operating system used on personal computers, found itself in .... he doesn't think the company is worth anywhere near $25 billion. |
Internet math & Google IPO valuation - 5/11/2004 12:36:56 AM
The Wall Street Journal reports in Yahoo, Google and Internet Math (sub req'd) that Yahoo and Google count revenues differently--so be careful when comparing valuations based on sales or margins.
Recent posts to www.buygoogle.com here, here, here and here report on how analysts are struggling to determine a rational value for the Google IPO. Most analysts compare ratios between Google and Yahoo--price to sales, price to earnings, sales growth rates, earnings growth rates, etc. But because the two companies count revenues differently, the comaparisons may not be valid. Yahoo counts the gross dollars collected from advertisers as revenue, then treats the cost to place ads on partner sites as an expense. Google is more conservative, and just counts net revenues--the difference between dollars received from advertisers and paid to partner sites. If Google counted revenues the more optimistic Yahoo way, Google's first-quarter revenues would leap from $390M to $652M. If Yahoo counted revenues the more careful and conservative Google way, their first-quarter sales would fall from $758M to $550M. So if you're valuing Google by comparing to Yahoo sales figures, your Google valuation will actually be too low--unless you correct for the different accounting treatment. So here's the net result. Yahoo's price-to-sales ratio for last year was 16.34. If first-quarter mix applies to last year, and if you adjust for the difference in revenue recognition, Google's 2003 sales would be $1.6B (instead of $962M) when reported using comparable Yahoo accounting. If you apply Yahoo's price-to-sales ratio to this comparable sales number, you wind up with a valuation of $26B. The Wall Street Journal concludes by recommending that you just throw out all these ratios and accounting differences--instead, look at free cash flow: So what is an investor to do? Mr. Mahaney recommends valuing Google, and other Internet companies, based on their free-cash flow, or cash generated from operations minus capital expenditures. "That removes a substantial amount of the distortions caused by different tax rates and what companies choose to include in terms of options and what they don't," he says. On that basis, Yahoo looks considerably stronger than Google. Mr. Mahaney projects that Yahoo will generate $838 million in free-cash flow this year, compared with Google's $476 million. If we apply Yahoo's price-to-cash flow to Google, the valuation nets out at about $19B |
Seven tips for avoiding 'Googlebay' - 5/10/2004 06:07:33 PM
From CBS.Marketwatch, a blistering tirade against Google's IPO. Here are some snips:
+ It's the same "irrational exuberance" of the late '90s + "Google's got America ga-ga, giddy and giggling again" + "Stop, dammit! Listen to yourself! It's happening again! Get a grip!" + "Not one of America's 94 million long-term buy-and-hold investors with an ounce of self-respect and a brain in their heads should participate in this idiotic bidding process. + The author rips Barron's for their justification of a $170 share price and $50B valuation of the Google IPO |
More on Google IPO valuation - 5/10/2004 02:21:29 PM
IPOhome.com has published a simple valuation model that compares Google today against its peers in the "Bubble Era"--Netscape, Yahoo, Amazon and eBay.
Google is bigger, more profitable and more seasoned than than those companies were when they went public. And if you use the same price-to-sales ratios from the bubble era, the model calcs a valuation of $24B for Google. So should we value Google using the Internet Bubble as our yardstick? It's worth noting that even though Amazon, Yahoo and eBay fell dramatically in 2000 and 2001, if you bought at the IPO and held until today, you'd be up over 2000%. Google has already changed the world through search. If they can continue leading the market with innvoation while maintaining awesome profitability, who's to say what it's really worth? |
Guessing Google IPO Value: $17 Bln or $50 Bln? - 5/10/2004 09:34:48 AM
Bloomberg tries to draw a bead on Google's IPO valuation, but comes up with more questions than answers.
The day after Google Inc. filed plans to sell shares to the public, Internet analyst Martin Pyykkonen estimated the company's market value at as much as $25 billion. On Wednesday, he revised that to as much as $50 billion. If there's any consensus, it's that a rational valuation is about $17B, but that crazed Google IPO fans will bid that up to $30B or $50B, vastly overvaluing the company and risking a mini bubble that will be deflated once reality sets in. But the analysts also say they don't have enough information to value Google yet. Analysts usually estimate market capitalization of companies planning to offer shares to the public by multiplying the expected earnings by the price-to-earnings [P/E] ratio of a competitor. Yahoo's P/E ratio (projected for 2004) is about 80, and is 118 for 2003. This is much higher than most companies. General Electric has a P/E of 19, Microsoft is 38, and Oracle is 24. Google earned $100M last year, so multiplying by Yahoo's P/E of 118 gives us an $11B or $12B valuation. Will Google's revenues and earnings grow faster than Yahoo? How much faster may determine how much of a premium to pay for Google over Yahoo. One analyst quoted in the Bloomberg story says, "Google is growing so fast that it may earn $1.50 to $2.00 a share this year, depending on its tax rate. Multiply that by 80, roughly Yahoo's price to earnings ratio [for 2004]," and you get a possible valuation in the $40B to $50B range. The big gamble for investors is that the Google IPO may be bid up in an auction gone wild to levels far above the company's fundamental value. "Calabrese, an analyst at independent research firm Argus Research in New York, said investors probably will pay more for Google than the company is worth....It's tough to come up with a valuation at $15 billion to $17 billion at most, and that's really stretching the numbers...The market is likely to value this thing much higher than the ongoing business would suggest." One analyst said the Google stock offering was a "trap," and that investors should "refrain from buying shares in the initial offering and purchase them only after the frenzy has passed and the stock has declined." See the posting yesterday about other considerations that could justify a larger valuation. |
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