Third Quarter Score: Google 49, Yahoo 0 (GOOG, YHOO)

First things first: A hat tip to Google and its champions. It's hard to express how impressive the company is, both in the numbers it is posting and the amount of confidence and ambition it has. Given the awesome rate of growth in the last eight years, lesser companies, or lesser people, would have blown apart at the seams.

Second: It is also hard to express how pathetic Yahoo seems in comparison. Only a year ago, the company was firing on all cylinders, gaining market share, innovating, inspiring the same kind of confidence that Google now does. Now, it's hard to imagine what the company will be able to do to stop the market share bleed.

Third: Despite the strength of the quarter, I stand by the prediction that, if the online ad market weakens, Google will feel it. Given that YouTube and Sequoia agreed to an all-stock transaction, it seemed unlikely that we would see weakness in Q3, but Q4 could be a different story. And I continue to think that the signs from Yahoo and others are that the market has started to weaken.

Fourth: I'm glad I own the stock in an index fund, but I'm also still glad I don't own any more than that. Thanks to continued strength over the past year, the company is growing into its valuation, but it's not there yet--especially in the face of a potential market slowdown.

At $450, ex cash, Google's market-cap is about $125 billion. The free cash flow run-rate is about $2 billion, the same as it has been for the last year. If we assume that the company is over-investing in CAPEX and that it will soon throttle back, the "normalized" free cash flow run rate might be $3 billion. So the stock is trading at about 40X normalized free cash flow.

Is that a fair multiple? It could be--if revenue growth settles into a steady long-term growth rate of 40%-50% and margins stay the same. If revenue continues to decelerate, however, or the company stumbles, the multiple could easily compress to 30x, especially given the sheer size of cash flow. So, as excited as I am about the company, it's still hard to get that excited about the stock at $400-$450 a share.

But I am glad I own it in an index fund...