Google: An Internet Index Onto Itself

Oct.22.07 | About: Alphabet Inc. (GOOG)

By Carl Howe

Google (NASDAQ:GOOG) announced earnings Thursday night (see the Conference Call Transcript on Seeking Alpha). Google blew out its quarter. Oh, and the sun came up Friday, too.

Now, I have to admit, when Google originally went public in 2004, I was a skeptic. After all, how could a company that had a nice search engine be worth $30 billion? Boy, was I wrong -- today, Google's market cap is about to cross $200 billion. So much for Google's value being obvious in 2004.

But today, I suggest it's worth every penny of that $200 billion. And in fact, I'm going to repeat my suggestion from this past summer: I think Google nowadays makes a pretty good Internet Index; think of it like the Dow Jones Industrial Average, but instead of stock prices, it tracks Internet business activity. When Google revenues, earnings, and stock price are up, the Internet business is good. If Google's earnings go down (hasn't happened much), that's a good time to start shorting Internet positions. My simplistic justification: If Google is making more money, the Internet business has to be pretty healthy, since most of their traffic and revenue comes from other sites and companies. if Google is making less money, you can be pretty sure everyone else is too.

Now I know lots of people are going to say, you can't just use Google to measure the Internet; Other companies have slices of the Internet pie too! To my mind, though, that's like saying that there's more to great chocolate mousse than just chocolate. There is, but if you took the chocolate out, it wouldn't be the same.

Here's an experiment: try going an entire day without using a single Google service. No Google searches, No Google Maps, No Google Finance, No YouTube, No GMail, no Google Mobile, no Google Docs, Blogger, Picasa, etc. Keep a tally of each time you find yourself discovering you either want to do a search or use one of those Google services throughout the day. At the end of that day, charge yourself $0.05 or each tick in your notebook. The multiple that final value by a billion Internet users and 365 days a year.

You've just defined the value of Google. Maybe that $200 billion market capitalization isn't so crazy after all.

Full disclosure: the author owns a few shares of Google stock.