The Financial Times reports that Internet search engine Google is considering an initial public offering next year that is expected to value the company at a minimum of $15 billion. The FT also says that
Though the company does not disclose financial information, its profits are growing rapidly and are reckoned to be running at an annual rate of about $150m on revenues of $500m.Anybody who is contemplating an investment in Google should consider the following:
As a point of comparison, here are some other companies that are currently worth about $15 billion dollars:
| Company | Revenues (Mil.) | Profits (Mil.) |
| AT&T | $35,886 | $904 |
| Union Pacific Corp | $11,167 | $1,066 |
| Waste Management, Inc. | $11,152 | $738 |
| Southwest Airlines | $5,607 | $401 |
| Tribune Company | $5,111 | $679 |
Google's primary business, I believe, is licensing its search engine technology to "portals" such as Yahoo! AOL and MSN. But how many such portals are there? How much money are they making? How many new portals are likely to be launched in the future? How much of the portal revenues are Google's customers inclined to share with their search engine vendor and how many other search technology companies are out there? Although the word Google has turned into a generic verb for performing an Internet search, and although some of us may make dozens of Google searches a day, how much revenue does each search produce for Google, Inc? Okay, there's a little bit of ad revenue from the "Sponsored Links" in the right-hand margin. But how much money does the average Google user spend at the various merchants who advertise, and how much is that advertising ultimately worth?
Google has great technology and offers a great service, and I wish its founders and employees well. At the same time, there is a sensible price to pay for a share of stock in Google, Inc. But a market cap of $15billion appears to be founded less on reality than on hope and dreams. Hope and dreams that financial history tells us are so often disappointed.
Posted by Stefan Sharkansky at October 25, 2003 03:14 PMGoogles primary income actually comes from adverts. The sponsored Link in yellow across the top, and the ones in blue along the right hand side.
Posted by: Brett on October 26, 2003 12:35 AMThis is just about the first post I've seen that is on the topic of "investment". I really wouldn't mind seeing more, Stefan!
Posted by: Joe Ego on October 26, 2003 11:13 PM
Yes, valuations at 100 times profits do seem to be hopes and dreams of fools. It's not a bad investment for the investor since they can sell it to a bigger fool. The problem is that the IPO will only be for about 5% of the company, with the remaining 95% being restricted somehow so that the insiders owning them or having options on them can't immediately liquidate them. Later, when they start to move thier holdings, the market cap comes down to something more realistic since the excess supply of stocks drives down the stock price. The bet is that the insiders will grow the company faster than they dilute the value of the stock by selling it, and that is a bet with long odds against. However, the Google team is a good one to bet on, in that they unseated 2 dominant players (Yahoo and AltaVista) to become the clear number one in search engine usage AND they provided the fairest and most efficient advertising system on the internet, for which they continue to generate revenue.
So it's still a long shot, but this team is more likely than most to live up to it's IPO promise in my humble opinon. I, of course, won't be touching it.
Posted by: Simon on October 27, 2003 12:22 AM