Google (GOOG)’s plans for a strong push into the mobile phone market has excited investors enough to not only push the stock over $700 per share, but perhaps even more startling, the Internet search and advertising giant is now the fifth most valuable U.S. company. For a firm founded in 1998, this is an astounding ascent in less than a decade.
My initial thought when seeing this list was to simply conclude that it is really ridiculous, and hence time to unload every single Google share I own. If you just look at the numbers and the other names on the list, it is hard to justify Google coming in at number five, no matter how dominant, profitable, and fast growing they are. But then I started thinking about other ways to put this list into context, and began to able to justify their position.
Let
me give a brief explanation and then please feel free to give both
sides of the argument from how you all see it. I have said before (and
maintain) that investors need to compare similar companies when making
valuation calls. They are called “comps” for those of you who have
worked, or do work in the investment banking industry. If you are
taking a firm public, you look at comparable publicly traded
competitors to get an idea of how much investors are willing to pay for
your client’s shares, which aids you in determining an IPO price. It’s
the same process when you are selling your home. The comps your real
estate agent uses to come up with an initial asking price is based on
houses in your neighborhood, similar to yours in size and amenities.
This
is important because we need to compare Google to other technology
companies. In this case, the comps would be the likes of Microsoft (MSFT),
AT&T (T), and Cisco (CSCO). Does Google belong on a list with those other
leading tech firms? Well, Microsoft owns the operating system and
business software space, AT&T leads in telephony, as well as Cisco
in networking equipment. All of these areas have become crucial to
everyday life and represent huge market opportunities.
Is Google really
any different? Sure, the Internet has really only been mainstream for
ten years or so, but think about how crucial it has become in most
people’s everyday lives. Compare how much time you spend on the
Internet to the time you spend on the phone on any given day, or using
Microsoft Office at work. I bet it’s comparable for many of you. For
me, it trounces those two.
Some mistake Google for “just a
search engine,” but we do many more things on the Internet than use it
to look something up. Email is a core communication tool, more so than
the telephone, for many of us. Just thinking about what I do online
now, the list is quite long. I pay my bills, maintain my address book,
get weather forecasts, go shopping, manage my fantasy football team,
trade my stock portfolio, check movie times, read blogs, get news
reports, get driving directions, book airline tickets, archive my photo
collections, balance my checkbook, manage a to-do list, etc. I could go
on, but you get the point. Before the Internet I did all of those
things via the television, the newspaper, the telephone, through the
mail, or at my desk. Now I do them all digitally over the Internet, in
many cases with the help of Google software.
If the Internet has
transformed our daily lives this much in ten years, isn’t it safe to
assume that it is not going away? If Google is going to be a leader in
providing many of these services, and can make money on them through
advertising (much like your local newspaper or television station),
then I can completely understand why they would be joining the likes of
Microsoft, AT&T, and Cisco in terms of market value.
Obviously,
things can go wrong and new companies can take over an industry. After
all, for every AT&T, Cisco, and Microsoft that has continued to
lead despite intense competition, there is a Digital Equipment, Silicon
Graphics, or Polaroid that has practically vanished because of it.
Google’s fate is unknown, but people are betting that they maintain
their lead, and I don’t think that is such a ridiculous belief to have.
In
my mind, if the Internet continues to change the way we live and help
us accomplish tasks more quickly and efficiently than prior tools such
as TV, phone, mail, or print media, and Google continues to be a
leading software company focused on enabling all of these things, who
is to say they shouldn’t have a seat at the head table with everybody
else?
Full Disclosure: Long shares of Google at the time of writing.
