Why This Is Credible… and Incredible

Posted: January 6, 2006 in Uncategorized
Wow.  I wonder if Jonathan Berr of TheStreet.com or Mark Stahlman, an analyst for Caris & Co., has been bugging my office?
Jonathan just wrote about the interview he did with Mark and I can’t tell you how many conversations I’ve had almost exactly like this… right down to the very logic.
So — I’m biased — but this is a brilliant analysis of why the excitement for Google (and by extension Yahoo and MSN) is credible… and incredible.
For example:
      "We believe that Google’s addressable market has a chance to become much larger, more quickly than initially anticipated, perhaps a $100 billion annual sales company over time," Stahlman writes. "Google is not limited to the size of today’s advertising market and is likely to expand into next generation financial services, and health care, among other digital service opportunities considerably larger than typically recognized."
     In an interview, the 57-year-old Stahlman, who as an investment banker wrote the prospectus that brought America Online public, stresses that he believes that the excitement over Google is different than the hype he saw during the Internet bubble of the late 1990s.
     "We now have the technology to actually build out digital services," he says. "We didn’t have broadband available in the 1990s. We didn’t know how to build grids of computers."
The article discusses Mark’s back-of-the-envelope calculations (using the same logic I use) for GOOG hitting $2,000… !
The only difference in our analysis — and it’s a huge one — is I haven’t thought past Google, Yahoo!, and MSN being bigger than $20 billion entities… but it’s now officially time to… and Mark does so in this article, brilliantly I might add.
Stop what you are doing and read this RIGHT NOW.
  1. Unknown says:

    Interesting hypothesis, but do the numbers really add up? US add spending (which is about 60% of the world total) breaks down into about $80B TV/cable/radio, $60B print, $50B direct mail, $13B yellow pages, $5B outdoor, $5B internet. There are a few markets–classified advertising and yellow pages–that are clearly headed for extinction, but in most of these markets, Google doesn\’t have much to offer and, even if their technology were useful, they would get at most a small cut of the overall market. I think a very optimistic estimate would be for an overall online advertising market of $50B by the end of the decade. Can Google get $20B of this? Maybe, but their percentage of ad revenue is much smaller outside of organic search. And, at a $140B market cap, the valuation already assumes they\’ve gotten to this level.

  2. Royal Farros says:

    I think they do… but here\’s my thinking.From last year\’s big AD:TECH conference, worldwide advertising is in $400 billion to $600 billion range.From conversations with a lot of people, including folks like Mary Meeker of Morgan Stanley, online should represent about 15% of overall ad market by the end of the decade. (Even more when true IPTV kicks in.)From market observations, big companies like Ford are now (as in today, not end of decade) spending 15% of F-150 ad budget online.So, I think online ad market size by end of decade can be more like $60-$90 billion.GOOG is 40% of market today. Arguments both ways whether this increases or decreases. (Certainly MSFT and YHOO will have something to say about this.)Assuming it\’s constant for the next few years, GOOG will be $24-$36 billion company.Using MSFT\’s sales/price ratio of 7.16 (which everyone believes is conservative), GOOG should be worth between $172 billion and $258 billion within the next few years.Using YHOO\’s ration of 12 (which everyone believes is expensive), GOOG could be worth between $288 billion and 432 billion.I wanted to say something like, "given an enormous number of assumptions, the numbers add up"… but then I thought that sounded pretty silly.BUT, then I remembered I\’m the most optimistic guy in the world when it comes to online advertising (especially since I believe I am, or was, my own very best customer here so to speak) and I\’m not sure all the assumptions are all that crazy: Online advertising *is* vastly superior than offline mechanisms.But, maybe your point isn\’t overall size but whether all these assumptions are *already* built into GOOG share price… ?I agree. Even with more "theoretical" upside, GOOG seems ahead of itself.Why has market done this? Same as iPod phenomena: The market is simply growing faster than even the most optimistic projections.So, until there is new news — like GOOG\’s growth rate has slowed — I\’m not going to fight this trend: Market is always wrong in the short run and always right in the long.