Google vs. CBS Corporation

Includes: CBS, GOOG
by: Intelligent Speculator

Last week I read a very interesting piece on the Wall Street Journal website about Google’s (NASDAQ:GOOG) valuation, as the author made an interesting argument. That Google should not be considered as a technology company but rather as a media company. Why? One of the main arguments was that Google’s revenues are almost only driven by advertising, like most media companies. I would not agree with this conclusion, but let’s assume that the author is right. When doing that, author Martin Peers argues that Google is very, very cheap. Why? It is trading at a 15.5 P/E ratio while CBS trades at 16.8, with Walt Disney (NYSE:DIS) at 16.4 and News Corp (NASDAQ:NWS) at 15.8. It’s an interesting line of thought and from that point of view, I can see how he would conclude that Google is cheap.

If Google is a media company, its valuation makes no sense

How could Google trade at a cheaper valuation than those companies? It makes no sense. Google is the leader in a market (search advertising) that is not growing as quickly as it used to but still remains well above double digit growth. Let’s not kid ourselves….. no “traditional media” industry (tv, newspapers, magazines, etc) is growing even close to that pace. Add to that other opportunities that Google has in display advertising, through Android, and other such ventures and it’s difficult to imagine how even 5 or 10 years from now, Google could slow down to the point where its revenues would grow at the pace of these other media companies.

But Google is a technology stock

The major problem I have with this whole article/opinion is that I do consider that Google should without any doubts be considered a tech company. There are many differences between the two and while some tech companies such as Yahoo (NASDAQ:YHOO) try to act as “double agents” in both sectors, the industries are very different in reality.

One of the main things for me is that technology companies can become obsolete very quickly. Google faces a lot of competition and faces a much bigger threat than traditional companies. How? Which of these two scenarios is more likely in your opinion:

  • A company like Walt Disney or CBS sees its shows drop market share (and thus advertising) by 30-40% within 30-40 years as the quality of the product diminishes or new competitors emerge
  • Google sees its search market share drop by 30-40% because Facebook, Twitter or Microsoft’s (NASDAQ:MSFT) Bing improve to the point where they become viable alternatives when searching the web.

I would argue that for CBS or Walt Disney to drop this much is nearly impossible while Google’s fall is unlikely but certainly possible. That is a huge difference and it is caused by the competitive barriers to enter traditional media compared with the ever changing technology sector. Just remember how dominant MySpace was just a few years ago.

So no, I don’t think Google should be considered a “media company.”

That being said, I think that while Google should not be considered “media,” media companies do face almost as much risk these days. Companies like News Corp are facing a lot of pressure from “new media” companies such as the Huffington Post and I think the valuations of the two will converge over time as media becomes as much about content as it is about technology and distribution. Things are changing fast.

In conclusion, while I personally love Google and think the company is a great buy at its current price, it’s difficult for me to justify why it should or would be priced as a media company; it just does not make enough sense to me. Do you agree?

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Disclosure: Long Google and no position on CBS