Why all the fuss over Google?

January 20, 2006 7:39 AM

Why all the excitement over Google? I read in Wired Magazine that there has been a "breathtaking ascent of Google" in recent months, but I don't know what it's all about.

They (Wired) say that it's "trading above $400." Is it overvalued? Or is it doing really great stuff that I don't know about?

I've always used Dogpile as a search engine, and get the results I need on the first or second query. It includes Google in its search. Is there something about searching specifically in Google that is extraordinary?

I know that g-mail has been big, though I haven't been able to get an account. I've had my Yahoo account for years and years; again, it does what I need it to do. What makes g-mail so special? I also know they're doing some cool things with maps that I should have checked out by now, and that Adsense is a big thing. Overall, though, I seem to be missing what the fuss is all about. Please clue me in!

posted by lisaj32 to computers & internet (22 comments total)

Google is a publicly-traded company, and its stock since its IPO has risen dramatically. Does this mean that Google is doing anything extraordinary, or that investors are eager to pour cash into the company? I think it's a little of both. The fuss is mostly about the fact that the stock price has gone up so much, not about what the company is actually doing.
posted by gwenzel at 7:47 AM on January 20, 2006

If you want a gmail addy, let me know

I use Yahoo! as my start page and for all my searching. I like Google Suggest but I rarely use Google for searching.

btw, there is an existing thread with many reasons people use Google.
posted by Makebusy7 at 7:49 AM on January 20, 2006

It's the dotcom bubble part 2. The dead cat bounce. Or not.

People argue that since Google has little or no debt, its total value is on par with bigger companies that have lots of debt, like GM for example.
posted by malp at 7:52 AM on January 20, 2006

It is valued as a business because they are making a lot of money on text ads. Everything else is pretty irrelevant to the investors.
posted by smackfu at 7:52 AM on January 20, 2006

Well, since you're talking about the stock price, stuff like g-mail and maps are almost entirely irrelevant. It comes down to their advertising revenue, which has been growing very rapidly. Some people predict it will continue growing rapidly until it owns the entire universe. At this point, I think the stock price is finally at the end of its run. Maybe. The argument that Yahoo is just as highly-priced no longer holds. Its next earnings announcement is coming up soon. If it exceeds expectations, the price will go up to infinity in no time. If not, it will be a lot less expensive a couple of weeks from now. Today at least, most people seem to be betting on the latter.
posted by sfenders at 7:53 AM on January 20, 2006

i believe a lot of googles value also rests in it's staff. it's had a history of hiring Phd's (and other high profile people in the industry). clearly, as a result of that, there's a lot of interest (speculation?) on what they are planning to do with all that potential.
posted by tnai at 8:02 AM on January 20, 2006

Another factor in the stock is that they are seen as having a huge amount of growth possibilities. How many directions are they going in right now? Growth equals more revenue and that is what investors want.
posted by smackfu at 8:06 AM on January 20, 2006

I like them because they have a track record of innovation, and have made a point of hiring the best minds they can find; which isn't only about money, or everybody'd rather work at Microsoft.
posted by atchafalaya at 8:06 AM on January 20, 2006

The big thing is Adsense and Adwords. That's where most of their revenues come from. People seem to be tripping over themselves to set up Adsense on their sites/blogs/whatever and advertisers seem to be tripping over themselves to advertise on them. Google sits in the middle and takes about 25% of the cash.
posted by wackybrit at 8:13 AM on January 20, 2006

I dunno, I think it's overvalued. That doesn't mean that momentum won't carry the stock higher - I think GOOG is a bit of a fad. Lot's of speculation based on media hype. But then, who knows? They're definintely doing some interesting thing.

For reference, Google's market cap is 126.20B with a P/E of 94. Yahoo's market cap is 48.89B with a P/E of 32, Microsoft's is 286.45B with a P/E of 22. There are, of course other indicators, but the market cap and the P/E of 94 sounds like dot.com style hype to me.

If you were buying the whole company, do you think GOOG's worth three times Yahoo? Half Microsoft?
posted by drobot at 8:20 AM on January 20, 2006

Overvalued is a very subjective term. To put it in perspective, compare the price / earnings ratio of Google and Yahoo!:
Yahoo!: 57x 2006 expected earnings ($34.33 share price / .60 EPS), 44x 2007 expected earnings ($34.33 / .78)
Google: 49x 2006 earnings ($436.45 / 8.76 EPS), 37x 2007 earnings ($436.45 / 11.86)

The above share prices are based on last night's closing prices. Google is down over 2% today. Also, I'm not sure if these EPS estimates reflect the research analyst's newest thoughts given that both companies recently announced the latest quarter's results. And one more caveat - Yahoo! needs to be adjusted to reflect the wild overvaluation of Yahoo!Japan. While I would normal make this adjustment, I don't have the time or motivation at the moment - but, it would bring the P/E multiple down a little but not below that of Google.

Anyway, the point I'm making is this: Google may well be overvalued, but it would be difficult to come to that conclusion by comparing it to Yahoo!. The fact that Yahoo!, which is certainly a highly hyped stock but not nearly as hyped as Google, trades at a premium to Yahoo! gives me some comfort about Google's relative valution. Of course, Yahoo! may also be drastically over-valued and is due for a blow-out, in which case I would expect Google to follow.

These astronomic P/E multiples seem highly unusually when you look at the broader market - the S&P 500 trades in the mid-teens. But the analyst's long-term EPS growth rate for Yahoo! and Google are 26% and 30% respectively. GE, for example, trades at 17x 2006 EPS and has an 11% expected growth rate. In general, greater growth leads to larger multiples.

(sfenders: Yahoo! announced on the 17th. Google announces on the 31st.)
posted by mullacc at 8:44 AM on January 20, 2006

drobot: Your P/E multiples are trailing earnings. Given the growth rates of these companies, the market tends to focus on forward estimates. Actually, that's the case with almost every company - but emphatically so in this sector.
posted by mullacc at 8:49 AM on January 20, 2006

the thing to watch is the advertisers. Once they start feeling they aren't getting a good return on their dollar the house of cards falls to the ground like it did with Yahoo. Right now Google is doing very interesting things with targeted advertising but eventually the rest of the ad world will catch up so my guess is that when you start seeing Google doing desperate things in order to keep their margins in line - it's time to cash out.
posted by any major dude at 9:03 AM on January 20, 2006

I heard a great comment on TWiT that Google's real business plan is becoming apparent- it's not search, or web applications, but the ability to put targeted ads everywhere. Basically, they've figured out how to deliver on the promises of companies like DoubleClick.

Whether this means their stock price is correct is something I'll leave to our resident bankers, but it's a proposition with an ENORMOUS upside.
posted by mkultra at 9:07 AM on January 20, 2006

mullacc - great points and good info all around, but I think it's valuable to look at trailing numbers to answer the question about google's 'breathtaking ascent', if less so to predict Google's future position. I'm not saying Yahoo's not also overvalued, too, but they have similar (if not identical) businesses.
posted by drobot at 9:08 AM on January 20, 2006

On a side note, last night I saw a Pontiac commerical encouraging viewers to "Google Pontiac for more information" and they splashed a Google screenshot. That's the first time I've seen Google being mentioned in a commercial and it's very interesting they took that route instead of saying "Go to pontiac dot com".
posted by like_neon at 9:46 AM on January 20, 2006

What made GMail so special in the beginning (besides the fact that you had to know someone to get an account) was the 1 GB size limit (which now seems to be about 2.5 GBs). This was back when most free services were only giving 2 - 10 MBs. The other big thing was that their Web UI was one of the more prominent first web apps that felt more like a desktop app.
posted by mmascolino at 9:58 AM on January 20, 2006

More informed speculation than actual knowledge, but Robert Cringely has had some interesting articles lately about where Google is going:


Sam Walton Taught Google More About How to Dominate the Internet Than Microsoft Ever Did

The Google Box

Google Can Win the Broadband Game

Google's Grand Plan to Take Over TV Advertising

Not sure if it will all come to pass, but fun/scary to think about.
posted by jacobsee at 10:09 AM on January 20, 2006

Google holds a very strong position in a market that is, finally, in the midst of a major disruption. That market is advertising.

Google has demonstrated that it can gain revenue by taking ad revenue that previously went to other media. Even more interesting, it is gaining revenue from people/entities that did not traditionally advertise for various reasons (unfavorable ROI, unpredicatble ROI, high cost to entry, etc).

Even more exciting to investors (and journalists who specialize in the corporate-heroic genre) is that Google has largely found that demand from advertisers has outstripped the supply of ad inventory (space to place ads on search results and the web pages of Adsense partners), thus suggesting the makings of a long run of further growth.

Google has two ways to address the inventory problem 1) stake out more "real estate" for ad placement. 2) Maximize the value gained from existing "real estate."

Since they are already dominant in search, they have to look elsewhere for more available real estate. Gmail is one route, their share of the web based e-mail market is pretty small next to Yahoo and hotmail, extending the reach of AdSense is another. Branching out into advertising in other media is another (though this is also about being able to offer advertisers a one stop shop for all their advertising needs).

As for maximising return on existing inventory, they can work to improve the relevance of the ads they place to increace the likelyhood they get a clickthrough. This has the side effect of increacing supply, because it helps increace the revenue to AdSense partners, creating the incentive for more publishers to use AdSense.

They can also improve the value delivered to advertisers by giving them tools to better track and improve their return on investment of their campaigns and by eliminating click fraud.

None of this is, by any means, a slam-dunk. Yahoo and Microsoft both have good technology, smart people, a large existing customer base, relationships with a range of content partners and a strong will not to be cut out of this market. As Google grows beyond web advertising it can be harder to track and optimize advertising effectiveness. Their core business could suffer if they get distracted by new opportunities. Blah blah blah.

I think it's most interesting to consider what Googleworld would look like. Ads would likely proliferate. Anything not displaying an ad would still be watching your behavior so as to make the next ad you see the one most likely to result in you dropping cash somewhere.
posted by Good Brain at 10:15 AM on January 20, 2006

As someone who bought GOOG at $130.00, and sold 1/3 of it last week at $465 ( out of prudence ), I have read way too much about Google in this regard. Yes, one reason why Google is doing so well are their financials. They have meet most analysts expectations quarter after quarter. They are putting up really big numbers with AdWords / Adsense. Now they are moving into radio advertising and television. But recently a lot of analysts are getting spooked about ClickFraud which could be a major problem for this portion of Google's business. That's one of the reasons Google is down 10% this week. But if you read the Ozzie and Gates memos that got leaked out of Microsoft, you start to understand the impact that Google is having with its business models.

But a lot of people believe Google's ambitions run a lot deeper than that. GoogleOs, Skynet, Magic Blackboxes. I heard one guy speculate that Google could become the first trillion dollar company. It's fascinating reading about Google speculation. In the information age, 'he who controls the information'.......
posted by jasondigitized at 10:30 AM on January 20, 2006

Wow, thanks for all the great responses! I guess I underestimated the impact of Adsense, which I should have figured out given the fact that you see those little ads everywhere. Also, I was unaware of their lack of debt and their practice of hiring Ph.D.s (Hmmmm, I wonder if they could use a psychologist. Should I send them a resume? Note to self. . . .)

The Wired quote was just given as an example. I'm not an investor, I just don't want to miss out on some super-cool technology or not understand something that everyone else gets. (Speaking of things that everyone else gets, what does it mean that I'm the last person on earth to get a gmail account? and why did they set things up that way?)

It sounds like there is a solid basis for the hype, and also like Google has taken on an almost mythical quality. It's a bit scary to think of so much power (and potential for more power) in one place.

I really appreciate the time, thought and information that people have given in their answers.
posted by lisaj32 at 2:09 PM on January 20, 2006

btw, Google stock just dropped like 10% today. it's below 400 now.
posted by lpctstr; at 2:48 PM on January 20, 2006