Google 2.0


It seems to me that Google is in the news everywhere I look. In just the past few months, there have been not one, but two books written about Google. I’ve listened to both books and to summarize: two Stanford Ph.D. candidates worked together to create the world’s best search engine right around the time that everyone knew Search was dead and portals were going to be the source of all potential income on the Internet. They had no idea how to monetize the service, thinking, erroneously as it turned out, that they could license search technology. The Google search technology is the ‘secret sauce’ that makes Google better than every other search engine available. Eventually they found a business model by selling keyword targeted advertisements (Google Adwords and Adsense) and the rest is history. Now their stock is trading at a P/E of nearly 100 and the market cap of the fledging company is over $120B. A P/E rating of over 100 in itself isn’t alarming. For example, when a company is having a down year a P/E can get quite astronomical since when you divide a large market cap with a small earnings, you can get a very large number for the P/E. However, Google is insanely profitable making nearly 50% profit on sales of $5B so a P/E of 100 is truly staggering. In order to quell this embarrassingly high profit, Google appears to be speculating in the high tech market by purchasing really cool technologies whose only common theme is that none of them show any obvious way of making money.

Don’t get me wrong, I love Google. I use it as my home page. Making things like Blogger, Google Earth, Picasa, and Google Maps available for free without the ad spam usually associated with such services is extremely generous. But I can’t help feeling that their recent buying spree shows some similarities of teenagers with a pile of cash. You won’t find them investing in any blue chip stocks, but you can rest assured that all the latest high tech toys and cool technologies are under consideration. I could hardly believe it when I read that Google bought a Boeing 767. I’ve been a pilot and aircraft owner for 15 years and have some experience with the costs of owning and operating (admittedly small) aircraft. The costs associated with running a B767 for a few executives is in the stratosphere. If you contrast a B767 with a Gulfstream 5, today’s gold standard for bizjets, it will be many times the operating cost. Also, a B767 won’t get into smaller regional airports, which is one of the attractions of bizjets in the first place, i.e., to avoid the expense and inconvenience of international airports and to arrive closer to your target destination. The complete story on the Boeing 767 purchase has yet to be written, but it’s in stark contrast to the frugal practice of purchasing Google’s 175,000+ servers as parts and assembling them by hand, presumably to save money.

It’s really not Google’s fault the stock is trading so high. People fall in love with stocks of companies whose products they use all the time, and when that company happens to be profitable, then all reason can fly out the window. Just about all companies that come in contact with such windfalls have to do something with the money, before it evaporates into thin air. So a buying spree induced by high valuation is nothing new. AOL used its unrealistic valuation to purchase Time-Warner, a company with real assets, and Time-Warner has been trying to forget about it ever since.

One of the reasons I think the Google stock price is not sustainable is because more than 99% of its income comes from Adwords and Adsense, and these revenue streams are in persistent danger of being co-opted by spammers who are creating link farms and splogs to exploit them. If there were other sources of income, or even other potential income sources on the horizon, that would add some stability. But I just don’t see it coming with the other services they’ve acquired.

I’ve been experimenting with Adsense recently on my own webpages just to see what the fuss was about. With a .4% click through rate and an average of $.30 commission per click, I won’t be quitting my day job any time soon. If I had a Starbucks habit, the Adsense income could cover me for a day out of each month. With such meager earnings for a site containing real information that gets thousands of hits per month, it seems like a tough way to make money. I suppose my click through rate could be higher if the algorithms that did keyword searches were smarter. For example, on my Ham Radio page, evidently a company that sells hams (as in the meat) has outbid the companies that have Amateur (Ham) Radio equipment for sale ;-). Similarly, the rest of the ads are equally lame pitching items that I’m embarrassed to see on my web pages. I wish I could provide Google with a list of sure-fire keywords that I know would be better target readers rather than letting the algorithms do the choosing based on words on my pages. I’ll continue to run this experiment for a few more weeks and report back if things have improved at all. If not, I’ll try something else. It won’t be for the money, but just so I can have some first hand experience with keyword advertising services.

In reading about the recent AOL stock deal where Google bought 5% of the company, all I could think of was “Why AOL?”. Considering Google’s mantra is ‘Don’t be Evil’, teaming up with AOL seems to me as the ultimate sellout. AOL is completely bereft of anything of value other than their captive audience that they hang on to with a maniacal death grip. Like many others, I was an AOL member in the 1990’s. My difficulty with them occurred when I tried to drop the service after I signed up for broadband. First of all, AOL makes it impossible to forward or even export your email, so that works as a deterrent for dropping the service quickly because you periodically need to check it for email until you’re able to notify everyone of your new email address. But the true face of evil showed itself when I called up to cancel the AOL account and got the run around from their people who would make up any excuse to prevent me from quitting the service. I was told lie after lie and thought that I’d have to hire a lawyer to get them to stop charging my credit card. The depths that they stooped to prevent me from leaving were unbelievable. The only way I was able to quit was when my credit card number got stolen and they were unable to continue charging it. So I don’t have a lot of respect for AOL. And since dial-up is so completely dead, I have to wonder what keeps their considerable, yet dwindling, user base hanging on to them. Buying into AOL seems a little like jumping the shark and I expect that the end is near. Not the end for Google, which still has the best search engine available, just for its over-inflated stock valuation.

6 thoughts on “Google 2.0

  1. After reading you dim view of Google’s stock price, I suggest that you change the title of your post to “Google $2.00”.

    — Jack Krupansky

  2. Hi Jack, I worry about the people getting swept up in the hysteria of a meteoric stock rise. It’s often followed by a dramatic crash. When I made that posting, GOOG had was trading around $420. Four days after I made my posting, Piper Jaffrey raised its target for GOOG to $600! The stock surged to $460 followed by a drop of nearly $100.

    Today’s GOOG’s trading at $360. Moral of the story? I know what I’m talking about, Piper Jaffrey doesn’t. Oh wait, I’ve picked some real stinkers myself in the stock market so scratch that last comment…:-)

    The problem I have with the stock is that GOOG is trading at 17 times its _REVENUE_, and the revenues for adwords have very low barriers to entry and are likely to see a price war, which could cause GOOG’s single source of income to start heading in the wrong direction. The only reason for GOOGs high price is that investors may feel that adword revenue is in its infancy and due to explode. But I think that you’ll find that all the high traffic sites have already signed up.

    One might argue that the real growth will be in the low traffic sites which comprise the ‘long tail’ and are more targeted to readers. But there’s no incentive for those sites to go through the trouble of putting adwords on those sites for and extra $5 or $10 per month in revenue.

    I think adword revenue has peaked, there are more competitors gearing up to enter the market, and there will be a gravitational pull toward the types of advertisers desperate for eyeballs (high margin, and/or questionable products/services) leaving less space for targeted adversing.

  3. I think that I know a fair amount about Google, and there is certainly much that I don’t know about them, but the one thing I know with absolute certainty is that I do not know what the future holds for *any* aspect of Google compared to any stage of their brief history.

    A lot of people are *confidently* making wild claims one way or the other, but I simply can’t see how they can honestly justify their claims other than as “wild guesses”.

    Has AdWord revenue (or profits) really peaked? I see no way of either solidly justifying or solidly disputing that assertion. Maybe it has and maybe it hasn’t. Who could possibly be so sure about it, one way or the other?

    A lot of people are making a big deal about the stock price. I think a lot of people are misguidely thinking that a stock selling for $400 (+/- $50) is inherently overpriced, simply because it’s hundreds of dollars. From the perspective of fundamentals, the absolute price is irrelevant. If Google were to do a 40-for-1 stock split, the price would instantly be $10 (+/- $2) and all of a sudden many people would cease talking about the stock price at all even though *nothing* would change about the fundamentals.

    Meanwhile, you could go and find *many* stocks with PE ratios or Price/Sales ratios *far* worse than Google and yet people will focus so much attention on how *bad* Google is when they’re nowhere near the worst kid on the block.

    This is simply an illustration of the extent to which emotions and human psychology are *huge* factors in any discussion about stocks.

    Even now, I don’t offer *any* recommendation on Google’s stock one way or the other. My core claim is that a market is “the sum of all curves” and it is up to each and every investor (and trader and speculator) to make up their own minds about every stock that they consider.

    It is important to understand that trading, speculating, and investing are *not* synonymous. New stocks are inherently speculative. The question of when to transition a stock from trading or speculative to investment is quite tricky. The fact that S&P continues to hold off on annointing Google as part of the S&P 500 probably tells us what *they* think.

    From an investment perspective I would simply note that Google does not pay a dividend. End of that story.

    From a trading perspective, the stock price is quite volatile, and that’s what traders like, so Google is an excellent stock for *trading*. Absolute price is not an issue for traders.

    As far as speculation, the stock *was* a solid speculation. Now, the stock is in a trading range and speculation is increasingly dicey. But once again, absolute price is not an issue for speculation. Momentum is momentum, regardless of fundamentals.

    To be clear, a stock’s absolute price has *zero* do do with it’s value to stock traders and speculators. And if it’s not paying a big enough dividend to be worth the attention of true investors, then why even talk about the stock and “investment” or “investors” in the same breath? That makes no sense.

    And a terminology nit: You don’t put AdWords on your site; you put AdSense on your site. AdWords is the program for advertisers, and AdSense is the program for publishers (sites wanting to run ads on their own site).

    I have AdSense on all of my web sites and pages. It’s a very low level of effort and essentially pays for my hosting costs. $5 to $10 a month for a site is worth the effort for a lot of people.

    I’ll close with a question: Why are so many people so offended or outraged or whatever by Google’s stock? Is it simply jealousy, or what? Why not simply *ignore* the stock and focus all your energy on whatever gives a return for yourself?

    Decide for yourself whether you want to be a trader, short-term speculator, longer-term speculator, or true investor and then pick stocks based on whether their performance “fits” your own personal profile.

    Probbaly one thing I think we can agree on is that Google is not an appropriate stock for *most* people.

    — Jack Krupansky

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