Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

11.21.06: Update: Google 500

Posted by Richard Koman - November 21, 2006

Google hit 500 today, closing at $509.65. That puts the company's market cap at $155 billion. Is this crazy?

No way, analyst Jordan Rohan told Forbes. There's just no underestimating the earnings potential of the search and ad giant.

"The bigger deal is what they’ve done to the Internet landscape. “Google 500 underscores how important it is as a disruptive force on the Internet. If there is no disruption there is no change and change is generally good.

"Google has an unparalleled ability to monetize traffic or restate it to internet viewers into advertising revenue for the portals they visit,” Rohan said. “No other company has a machine with that sort of power.”

Anthony Noto with Goldman Sachs told the Times that Google is running a “flywheel.”

“They can reinvest at a faster rate, they can innovate at a faster rate, they can create value for advertisers and users at faster rate."

And Paul Kedrosky points to this calculation of Google's market cap as a percentage of Microsoft's.

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UPDATE: From Tom Foremski

Roger Ehrenberg over at Information Arbitrage has a great analysis of how simple it is for GOOG to make money by simply acquiring users at a price far below the money it can make per user:

“The Tube” spends most of its dollars on technology to route, upload, access and search videos, based on user requests. Google paid $1.6 billion for 72 million unique monthly viewers. That equates to an acquistion cost per customer of $22. You can argue over the 72 million users, so if we cut that in half (to forestall any arguments) to 36 million, that’s a cost per customer of $44. So to Google, a YouTube customer cost somewhere in the $22-$44 range.

3. Other Media Outlets - By the Numbers

TV

Fox’s American Idol has 21.1 million viewers. At $660,000 for a 30 second spot, a 1-hour show would have close to 15 minutes of commercials yielding a revenue of $950 million a year (30 spots a show X 4 shows a month X 12 months), or an implied value of $45 per user.

NY Times

The New York Times Company, has seen better days. In the last 2 years the stock has gone from the low 40s to the low 20s. Imagine that - 50% of its market cap erased in 2 years - a direct result of online media taking its toll on MSM. NYT currently has a market cap of $3.3 billion, Net Income of $259 Million, and a 5% profit margin. They have 1.7 million print subscribers and 37.7 million unique web viewers per month, which includes About.com. For arguments sake we’ll put them together for a total of about 40 million viewers. Using our admittedly rough methodology a NYT customer appears to be worth approximately $82.

The Googleplex

With a market cap of a stunning $144 billion, Net Income of $1.4 billion and 25% Profit Margin, what is a customer worth to The Beast? In the strictest sense Google is all about advertising, and it has rapproximately 380 million unique monthly users according to Neilsen/NetRatings - spending an average of 22 minutes on the site. The market cap divided by the number of unique users per month nets a per customer value of $380. Zowie.

4. YouTube - the Verdict

With YouTube valued at $22-$44 dollars a user, Google must see this and be licking its chops. Or, to me, “This is a grand arbitrage opporunity.” Google knows what it can squeeze from a user, how it can scale users and how much it should pay to acquire users. I’d say that $380 in vs. $22-$44 out represents the kind of margin of safety value investors can get their arms around. Even if the ad market gets increasingly competitive (say, if Yahoo! can ever post a credible challenge), and they can monetize even at the levels of the NYTimes, that’s a YouTube valuation of $2.8 billion ($82 X low-end 34 million customers). In short, this represents a pretty nice IRR given the likely monetization time horizon. Even a little exposure to the Googleplex can go a long, long way.

Read more here: http://www.informationarbitrage.com/2006/10/google_a_ben_gr.html

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