GOOG Worth $200 Billion?

Posted: October 15, 2007 in Technology and Business
With all the buzz about GOOG topping $600 last week, the new game in town is to debate whether GOOG is worth $200 billion or not.
 
Here’s my response to the Silicon Valley Insider (Henry Blodget) question:
 
Would you keep GOOG or take
 
  • Time Warner, News Corp, and Disney
  • 2/3 of your Microsoft stake
  • All the public ad agencies, plus $150 billion in cash
  • $200 billion in cash
  •  
    Disclaimer:  As you read my response, remember I’m the most optimistic guy in the world about online advertising!
     
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    Henry–
     
    Keep Google. Here’s why:
     
    (1) Opportunity Size
     
    People can’t seem to comprehend the size of the ad opportunity since it’s so off-the-charts. Overall ad market estimated at $400-$600 billion (compare that to just $300 billion for entire enterprise software market… why do you think MSFT wants a piece of the ad action so badly?). Online ad revs will be $20 billion in 2007 (source: IAB http://www.iab.net/news/pr_2007_10_04.asp). That’s only 3-5% penetration. That means we’re still in the very early innings. Kinda like Microsoft selling to IBM when it was only a couple billion, what a mistake that would have been. Another data point: $1.6 billion seemed like a ton of $’s to Overture management… but they can’t be very happy with that sell-out now.
     
    (2) Operating Model
     
    Compared to Google, I wouldn’t want to run those other businesses… not just because they aren’t growing like Google… but the cost and effort to operate those businesses — compared to GOOG — are enormous. GOOG’s operating model is *singularly unique*… it’s simple, sticky, and will scale as traditionally offline segments — like TV — become online segments. (Imagine what happens when some of the big TV networks start outsourcing their advertising to GOOG… seems unbelievable… but that’s exactly what is happening on the web, who would have thunk that?) Understanding the extraordinary benefit of GOOG’s operating model is crucial to understanding why P/E may be the best way (the only way?) to evaluate GOOG during its run-up.
     
    (3) Summary
     
    I don’t believe that Google will own the entire ad world… that can’t happen because advertisers really do want alternatives. But, Google could eventually own 20-25%… or a $80-$150 billion piece… which, taking a 5 price-to-sales ratio (about what many of the mature techs have today), that puts a $400-750 billion figure on the company.
     
    Given how fast Google is "sucking the life out of old media" (http://www.internetoutsider.com/2007/08/the-great-adver.html), this could happen in a 5-10 year period.
    Other than owning Google, the only other chance to get that kind of return — with this large of a stake — is with the cash option and doing massive private equity plays like, well, buying GOOG.
     
    –Royal.
     
    P.S. Important to add that this doesn’t include any *new* businesses GOOG may decide to get into… after all, these folks think in 15-year horizons… and we know their appetite is limited only by their imaginations. Suppose they get into electric batteries and electric cars… make it sexy to be green… disrupt the entire oil complex? (Buying Tesla Motors could be a start.) Security stuff? Obviously we’re living in an ever increasingly dangerous world… and that’s all high tech. Financial services? Sports? Education? Entertainment? It could be a long time before "GOOG the global holding company" runs into saturation points… and out of challenges.
     
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