Google Valuation

ValueCruncher tilts at Google – and finds the $500 per share market value wanting.

It’s hard to justify the $500+ valuation based on fundamentals – Google made 1/64th of it’s market cap in the last 12 months, and expects to make 1/37th of its market cap in the next 12 months.

Somehow analysts manage to keep upgrading their valuations as the price rises. I’ve seen this movie before – back in 2000/2001.

But the Google story is a great one, and they are in pole position to take advantage of the increasing importance of online advertising.

The global advertising market is forecast (ZenithOptimedia) to be $US421 billion in 2006, of which online ad spend will be $24 billion.

Already Google’s last 12 months revenue was $9bn, (YHOO made $6bn) so either they have close to half the market, or the online market is growing even more rapidly than expected. Either one of these is great for Google.

$24 billion is a lot, but that’s just 5.7% of global advertising spend. The rest of that spend is increasingly wasted on those valuable 18-35’s.

I know it is almost complety wasted on me.

Instead of TV there is the interaction of the internet, and if there is TV (sports) then the ads are skipped anyway.

Instead of newspapers there are blogs and online newspapers

Instead of movies there are DVD’s, youTube, iTunes, P2P and games – viewed on a HDTV or projector that approaches theater experience

Instead of radio there is the iPod and itunes.

Sooner rather than later there will be a sharp shift in ad spend, as it moves closer to the split of media time spent by consumers.

If online advertising moves to 40% of global ad spend, then it would approach $200 billion in the next few years. If Google had 30% of that market, then their revenue would be $60bn, and their EBITDA (at current rates) over $25bn. Microsoft has EBIT of $19bn, and a value of $265bn – so Google’s current value of $145bn is now vaguely justifiable. But I’m not investing – it is too much of a hype stock.

Published by Lance Wiggs

@lancewiggs