As Google (GOOG) hits its all time high today, of over $117 a share, the updraft is likely to suck a number of punters sitting on the sidelines into the game. For many of these investors, there is no rational argument; for them its enough that Google emerged from nowhere to become one of the world's most recognizable brands in a few short years, to become everybody's favorite search tool and that it has now established market "momentum". If you bet this way, you will be tempted to jump in now and ride it up to say 150, picking up your profits along the way. Good Luck!
Hidebound value investors will see the activity at GOOG as the kind of bubble folly that brought billions of losses to investors in AOL, Yahoo, Amazon, Nokia, etc. who jumped in for a ride in irrational exuberance. No company, they argue, can sustain a P/E of 160 or a market capitalization 33% higher than venerable General Motors. Folks who poohed-poohed that kind of sage advice in the past, will listen with one ear, as they might when getting admonished by a rich and comfortable uncle, all the time looking forward to visions of laughing all the way to the bank.
From where we stand, Google has proved itself an amazing company and certainly deserves the success it has received so far. Unlike, EBAY, perhaps the greatest Web success story, GOOG relies strictly on intellectual property, or sheer brainpower. This is the source of our great respect but can you make an economic case for a company that makes its living by weaving its presence into what is actually a dynamic cloud, the great information pool that is the World Wide Web?
So first, the economic arguments: does Google meet the fundamental economic criteria, a marketplace big enough to sustain huge profits over a long period of time and a sustainable position of dominance within that market? To the first question, we can respond, unequivocally, yes. Here's why Google's potential market towers over that of EBAY and even Amazon, two companies that have also both successfully multiplied their presence across Cyberspace. But EBAY's and Amazon's limitations, to a certain point, are mainly physical. Certain items, like Pez boxes, lend themselves to shipment purchases. Other larger items, and big ticket items bring much greater hurdles to an EBAY transaction. What do you do with the 500 lb. home gym set you just bought on EBAY if it turns out defective? So the dealer agrees to take it back. You're still stuck with repacking, shipping and the hassles involved in any returned transaction. Of course, you can tarnish the vendor's reputation and thereby protect future folks like yourself but still. So, EBAY, as great as it is, has some limitations.
Amazon is also terrific at what they do. By teaming with used and rare book sellers, home reviewers, etc. they provide a powerful service and for a lot of items, Amazon beats going to the local bookstore. Amazon has also been quick to take advantage of the dynamic Web in profound ways that range from sophisticated software that makes recommendations based on purchases by other people who match your eclectic tastes to affiliate programs on various special interest web sites to services like Alexa which attempts to determine interest movement as it pulses through the dynamic web and, oh, by the way, match that interest with items that can be purchased on Amazon.
The power of Google is different, and in our estimation, degrees above that of the two successful companies that emerged from the last wave, should Google dominate. That's because Google has inserted itself into wired peoples' lives in a more profound way. Because of the absolute simplicity of its user interface --often just a point on a bar at the top of your browser-- Google takes almost no effort to access. It has become as simple as turning to somebody, perhaps a bit opaque but amazingly wide-read standing next to you and asking whatever it is that you need to know for that moment.
"Okay," some of you ask: "I see the power and reach but where's the economic model?" The answer, of course, is apparent: much of what people want to know determines how and where they will spend their money. In other words, if you can ask Google where you and your friend might find a restaurant that serves traditional Iranian food and that is located within 10 blocks of the SoHo bar you are sitting in, and it gives you via survey result, a review and some pleased customer comments something that sounds reasonable, your mind just might get made up. Along with the results, which may or may not be satisfactory (since, often the information you looked for, may not exist in a way that GOOG can understand it) you will get advertisements by restaurants that match the profile of your search. Google will pass those paid advertisements along with the list of hits.
We will, sooner rather than later, all carry around cell phones that allow web browsing. It's already part of the Cybersphere and will only get more ubiquitous. Meanwhile, those of us at our desk tops will use that time to do our research though a few degrees away from real time. We'll continue to want to know as much as we can about what we plan to consume. Is it any wonder that companies like Verizon are quietly selling off their still extremely profitable Yellow Pages businesses?
Google's power, as we said, is purely in the algorithms buried in its software. GOOG can take what were once called natural language queries and turn them into sophisticated results. To be accurate the software needs to be constantly crawling the web looking for updated information. The real magic at Google occurs in it's evaluating the relevancy of the site information it points you to. For this, the engineers at GOOG constantly fiddle with algorithms designed to measure that relevancy. Roughly speaking, Google software measures, for instance, the value of a particular source using its knowledge of how many sites point in and out of a particular Website, thereby calculating the relevancy and topicality of those sites as part of the weighting. The evolving thinking that goes into these measurements represents, of course, the crown jewels, of the company.
In other words, that's the great caveat emptor of this equation. With so much at stake and with GOOG so clearly ahead in a multibillion dollar advertising business where the sky is the limit, will somebody cut it off at the pass?
That's why companies like MSFT, YHOO, and AMZN et al. will put huge resources into this space. The real question for the long run is whether Google can keep its lead. The history in high tech is that when a company reaches a certain dominant position it becomes nearly impossible to dislodge it. When it comes to search, has Google crossed that threshold? That's a question only time will tell.
