Google: 500 Reasons to Worry by Jacqueline Doherty
Highlighted companies: Google Inc. (GOOG), Yahoo! Inc. (YHOO), IAC/InterActiveCorp (IACI)
Summary: Barron's was (wrongly) skeptical about Google Inc. (GOOG) stock at $360; yet it's even more wary today. Google now has the 15th biggest market cap in the U.S., and its P/E ratio (close to 40) is 3x comparable companies'. Earnings estimates for 2007 are $13.70 (+33%), which looks great, but is actually weak compared to 2006 growth of 81% -- and the 2007 number ignores $1/share of stock option expenses and gives earnings-credit of $1/share for interest earned on GOOG's $10b stash of cash. U.S. search revenue growth, its mainstay, was down to 6% growth q/q in Q3, compared to double-digit growth a half-year ago. Competitors Yahoo! Inc. (YHOO) and Ask.com (owned by IAC/InterActiveCorp (IACI)) grew search volume (30% and 25%) by more than GOOG (23%), resulting in a market-share slippage to 49.6% from 50.2% in August. The average price per search keyword is down 11% since the beginning of the year and 34% since April 2005. Net revenue should rise 81% this year, but R&D will go up 133%, sales and marketing 96%, admin expenses 119%, and capital expenditures 129% (to $1.9b), meaning GOOG must continue to grow revenues rapidly to keep up with its spending. A setback in consumer spending, if it materializes, will hurt advertising revenues. "Could Google have a great fourth quarter? Sure. Could the shares soar if it decides to split its stock? Definitely. But, at some point investors will focus on the company's slowing growth rate and bloated expenses. And when that happens, look out below."
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