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Wednesday, February 22, 2006

Drilling Good Sense Into Google Price Movements

When, Mark Stahlman of Caris & Co. set a price target of $2,000 per share on Google, I laughed at it and called for good sense to prevail. Subsequently Google share prices tumbled and now the interest in the stock seems to be pushing it to get more strong at the bourses. Financial Times has an excellent roundtable discussing Google’s prospects. The discussions are really good – some points stand out – excerpts here:

Jeff Mathews points out that Google’s first analysts’ day in February 2005 caused a modest sell-off in the stock as the company demurred on providing a forecast for its earnings growth. Henry Blodget points out to the cash flow situation. Seven years old and the company is already generating about half the cash flow of Time Warner. The big question now is whether the cash flow 1) can be maintained, and 2) continues to grow at a healthy rate from here.Jeff Matthews highlights that the biggest risk to Google’s existing revenue base may be dilution from its own success in search. More keyword bidders are driving up the cost of keywords to uneconomic levels - at least that’s what has happened at two large search marketing users, FTD Group and Blue Nile. Google Mail, Google Maps and Google Base only exist to drive more search, which runs the risk of further diluting the search model. There is such as thing as too many search ads chasing not enough clickers. Consequently as he sees, it is doubtful if Google Base or Maps or Mail adds much to Google’s search revenue. And as far as Google branching into the pay-per-download revenue model via Google Video, the speed with which mainstream media is adopting a video download model (after watching the music industry fight the trend unsuccessfully) probably renders Google too late to benefit in a significant way from an Apple-style video download business. The next big revenue stream for Google will be adopting its search model to a “click-to-call” model in which consumers can click a button or an icon and be connected with the company or service provider. The value of a live customer on a phone is far higher than a person who simply clicks on a web-based ad
Well If I were to understand the company better – I would like to have a lot of questions answered. As I wrote recently its time, Google clearly explains its vision that it is executing for the next 2-3 years – very important that there should be a plan to grow and sustain the huge marketcap (incidentally bigger than the GDP of some oil producing Asian nations – the likes of Indonesia.) contrarian views about Google’s valuations definitely need a closer examination.I think this issue needs some serious evaluation as I had been pointing out for sometime like here, here about google's ability to sustain its leadership and support the very high marketcap. Google has to come out in the open about its plans for spending the money say building its own Internet, online index,along with monetizing models in more specific terms.

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