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Google The Internet The Almighty Buck Businesses

Ambiguity Drives Google's Valuation 297

Posted by Zonk from the i-want-a-cfo dept.
BreadMan writes "The Economist has an article about how Google uses its amorphous positioning to gain investor interest. At the current valuation (the P/E is north of 110) this is a winning formula, but the article questions the long-term soundness. The reporter was chagrined that the last press tour focused more on the CFO (Chief Food Officer) and the monthly pasta consumption (500 lbs) than products or financial performance of the company."
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Ambiguity Drives Google's Valuation More

Ambiguity Drives Google's Valuation

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  • Proven innovation drives it... (Score:5, Insightful)

    by garcia ( 6573 ) * on Thursday July 14, 2005 @10:39AM (#13063438)
    IT IS hard to know whether to be impressed, suspicious or amused.

    Combine such evidence of frenzied activity with mysterious secretiveness, and the imagination is liberated. A Google web browser? A Google operating system? All the world's information? World domination? Buy, clearly.

    What is so hard to understand? Google, in a relatively short time, has been able to come to market with some amazing pieces of software that are stable, useful, and free even in their "Beta" stages.

    I can't say that for plenty of other companies out there with huge market value... Some of those companies released "final" products that were little more than "Alpha" quality software that we tested for them on our own dimes for 15+ years.

    Google, secretive or not, is producing good software at an alarming rate (yes, alarming is the word to use here) and at this time should be invested in. While I don't write for the Economist, it's pretty obvious to me that it's not Google's "ambiguity" driving its value, it's Google's proven track record which is getting people interested.

    What's a couple thousand dollar gamble for most people that might have missed Yahoo's rise to fame and fortune? Knowing what Yahoo was/is doing and how that compares to what Google is doing now shows that this might be a better bet and people are willing to sink that cash into it.
    • Google, secretive or not, is producing good software at an alarming rate (yes, alarming is the word to use here) and at this time should be invested in. While I don't write for the Economist, it's pretty obvious to me that it's not Google's "ambiguity" driving its value, it's Google's proven track record which is getting people interested.

      The rate of software development *is* alarming to investors. Investors are primarily concerned with making money. The problem with Google's business model is that the "making money" part is very hard to nail down. It's definitely there, but it's always very clear how it works on existing software. Upcoming software is even more nebulous, especially given the fact that Google doesn't necessarily know themselves.

      *That* is why Google has to be ambiguous. If they don't, investors will start demanding hard (read: easy to understand) money making products. As long as Google is a black box that grows money, however, the investors are happy.

      • The CFO is more important than quarterly numbers. (Score:5, Insightful)

        by team99parody ( 880782 ) on Thursday July 14, 2005 @11:06AM (#13063659) Homepage
        The reporter is missing the point and Google is correct that thier culture (of which the CFO is but one case study) is much more important than the current quarter's results.

        Google success has nothing to do with Q4 2005's financal statement (it has enough short-term cash), and everything to do with keeping the talented engineers it hired and keeping them motivated to outperform MSFT in the long term.

        For this goal, the Chief Food Officer is infinitely more imoprtant than the Chief Financial Officer.

        • I think the article is spot on, and the reporter is not confused about anything at all - the reporter is rightly asking what the valuation of the stock is really based on - reporter notes vague handwaving, a non-committal (beta) software stream, much, much rumours, and the fact that people at google like to eat. The reporter asks - in not so many words - how and when google will start delivering on that stock price - i.e. where google's *80 billion* valuation is hidden, and how, if at any time at all, this will be capitalised.

          Google's success is not at doubt, rather, the reporter draws some subtle parallels to the dotcombusts of yesteryear, and hints at potential repetition and subsequent dissapointment of those times.
          • I think he is confused.
            • The software market is of size $X billion or trillion.
            • Google is is the first company in a very long time who has attracted a team capable of taking a chunk of this from MSFT.
            • "how and when google will start delivering on that stock price" over the short term has more to do with MSFT's monopoly practices and how aggressive they are in using their desktop installed base to redirect google customers to MSN. The answer Google quite eloquently explained to the reporter is that it
            • Google is is the first company in a very long time who has attracted a team capable of taking a chunk of this from MSFT.

              Interesting comment, since Microsoft is in the business of "Selling" software, whereas Google is in the business of "selling" web-advertising. If you haven't noticed, those are two very different businesses.

              Where MS is concerned is that it's software monopoly is stagnating a bit and it wants some of the web-related business that Google has.

            • Re:The CFO is more important than quarterly number (Score:4, Insightful)

              by BewireNomali ( 618969 ) on Thursday July 14, 2005 @12:15PM (#13064495)
              google doesn't sell software dude. they give it away for free. thus they don't really compete with MSFT. Also, because they don't do formal releases, instead opting for "soft" releases forever in beta, they obfuscate issues about the quality of any product other than search.

              also, they engage in all of the practices that MSFT does: they find small companies with interesting pieces of software, determine how value can be added to search and then buy those companies out. It's exactly what MSFT did.

              In regards to innovating, for the most part, they don't even innovate. Their one true innovation is the excellence in search, but for the most part, they enter niche markets where software companies are trying to eek cash out of products, buy them out and release the shit server side for free. Always in beta, and always for free.

              Or like GMAIL, offer more for less. Here's a gig of space. Make it seem exclusive even though it's not. Better targeted ads and a group to experiment on endlessly. I often know the content of my emails by looking at the ads before I read them.

              And your point about not mattering re: short term and long term investors... is that a joke? Page, Brin, and Schmidt together own about 10 billion worth of stock in a company with an 80 billion market cap. They probably don't even get called on when they raise their hands at the board meetings. You better believe that they care about quarterly earnings, especially if MSN and Yahoo start actively undercutting Google's only consistent source of revenue, which they both can afford to do.

              Re: the importance of the chef. LOLOLOLOL... ummm, I don't know, dude.
            • The parent poster says "The answer ... is that it doesn't matter at all when google will start delivering on that stock price to a long-term investor, and that they don't give a shit about day-traders gaming their stock." The issue the Economist focused on, the price to earnings ratio, is one used by long-term investors to judge the relative worth of one investment over another. Specifically, P/E is used to predict the long-term performance of an investment. If the price is low, and earnings are high, and
        • I don't mean to disagree completely, but I think those talented engineers will, in the end, care more about whether their paychecks clear and whether their stock options are worth something than whether their pasta is cooked al dente.

          That Chief Financial Officer does have a thing or two to do with engineer satisfaction.
          • I don't mean to disagree completely, but I think those talented engineers will, in the end, care more about whether their paychecks clear.

            Most of the ones that matter never need to worry about a paycheck again in their life.

            They stay at Google because of the culture and to interact with other top people in their fields.

        • Google success has nothing to do with Q4 2005's financal statement (it has enough short-term cash), and everything to do with keeping the talented engineers it hired and keeping them motivated to outperform MSFT in the long term.

          Talented engineering is necessary but not even NEAR sufficient to build an actual business. As the Economist says: maybe those engineers will come up with a cure for the common cold. Or maybe they'll come up with reams and reams of perpetually-beta services that are really techn

      • *That* is why Google has to be ambiguous. If they don't, investors will start demanding hard (read: easy to understand) money making products. As long as Google is a black box that grows money, however, the investors are happy.

        Except it's unwise to invest in black boxes that grow money, because often they tend to, sometimes without much warning, kick into reverse.

      • Re:Proven innovation drives it... (Score:4, Insightful)

        by abb3w ( 696381 ) on Thursday July 14, 2005 @11:41AM (#13064066) Journal
        *That* is why Google has to be ambiguous. If they don't, investors will start demanding hard (read: easy to understand) money making products.

        Back in days of yore, Bell Labs and GE R&D did a lot of random research. Not a lot of what they researched made big money. Not all of it even ended up making money for the company that did the research-- many things fell by the wayside, and were picked up by others. But enough things made big money that they fed back into keeping the company profitable.

        Google seems to be working in a similar mode. The good news is, this can make big bucks. The bad news is, there's a narrow operating region where this sort of thing works. But it's also very easy to kill. Investors who get too greedy and want to "focus on results", license-obsessed legal teams who think they should milk every dime out of every development instead of letting others who are willing to make innovations profitable also get rich by working really hard, managers who don't understand that if the guy who spends all but two days each year staring out the window admiring the birds also comes up with a billion dollar idea each year on those other two days then they should let the fucker STARE.

        And it can be killed at the other end: employees who begin (or start of by) thinking the perks are the point instead of the work; the difficulty in thinning nice people who are not only unproductive but who distract the productive; the problems in maintaining a culture with staff who produce nifty shit, instead of just turning food into shit; and the difficulties of figuring out which ideas are billion dollar babies that should be kept in-house, which are multi-million dollar babies that should be licensed, and which are nifty stuff [wikipedia.org] that you don't see what it's good for [wikipedia.org], but that you figure someone ought to be able to get rich off of it after enough work [wikipedia.org]-- that you should let go.

        They need to do three things:
        1) Keep hiring brilliant people.
        2) Keep the culture focused on invention and innovation, instead of slothful, litiginous, or short term payoff obsessed. This includes workers, managers, and stockholders.
        3) Periodically identify ways to make some money off of some of what they're doing.

        What they might do, if really clever, is hire some sociologists and specialists in the history of technology, have them go around and do cultural studies of successful and unsucessful innovation centers to try and isolate important factors, and try to figure out how to subtly encourage a culture that will continue to innovate, rather than turn and stagnate. Make a couple small spin-off research groups, and field test the ideas THERE, so they don't screw up the main company.

        And once they isolate the formula,Pinky [clampettstudio.com], they can proceed to take over the world [webcomicsnation.com]!

      • exactly. it is ambiguous because google itself is uncertain about the long term implications of many of its pieces of software. It all has to connect to search; so it seems like they are building the infrastructure for even more detailed and specific search, all to deliver more ads.

        as far as google is concerned... more bits of software, more eyes. More eyes means more ads.

        you are right though. making money is the issue.

        it should be interesting to note that Brin, Page, and Schmidt have cashed out a signif
      • As long as Google is a black box that grows money, however, the investors are happy.

        Given that some of their employees are NSA - I would expect this approach. I wouldn't be surprised if Google is doing Top Secret work for the government (remember the 'Total Information Awareness' office, that had its name changed) which would argue for keeping a lid on exactly what they are doing...

    • Re:Proven innovation drives it... (Score:4, Interesting)

      by BlogPope ( 886961 ) on Thursday July 14, 2005 @10:46AM (#13063506)
      What's a couple thousand dollar gamble for most people that might have missed Yahoo's rise to fame and fortune?

      Couple thousand? That's less than 10 shares at current valuations. Google may be a good company with good products, but there is nothing realy to justify the insane price their stock is selling for. Its turned into a giant Ponzi scheme that will end up with a lot of money going down the toilet, which could potentially bring a lot of other things down with it too.

      • Re:Proven innovation drives it... (Score:4, Funny)

        by Tackhead ( 54550 ) on Thursday July 14, 2005 @10:53AM (#13063563)
        > Its turned into a giant Ponzi scheme that will end up with a lot of money going down the toilet, which could potentially bring a lot of other things down with it too.

        ...Poogle?

      • Re:Proven innovation drives it... (Score:5, Informative)

        by jxyama ( 821091 ) on Thursday July 14, 2005 @11:31AM (#13063926)
        The price itself has nothing to do with "insanity." Would your viewpoint change if Google were to split 10 to 1, bringing down the price to around $30?

        P/E ratio and other metric used to relate the stock price to financial performance may seem "insane." But the price itself doesn't matter.

        • MOD PARENT UP (Score:2, Insightful)

          by dukeblue219 ( 212029 )
          This is a very important thing to know. The price of a single share of Google is irrelevent. You may only be able to buy 4 or 5 shares, but it represents a greater percentage of the company than 4 or 5 shares would of, say, Dell.
      • ...but there is nothing realy to justify the insane price their stock is selling for.

        There is never anything to justify the price of any stock. At the best there is only after the fact remorse or jubilation or simple fatigue all backed by much rationalization. The real question is what you'd put money into that you think would outperform GOOG. Right now, I'm heavily weighted in the non-US markets, but that's mainly due to the abysmal state of US monetary/trade imblance issues which should have the chick

    • Re:Proven innovation drives it... (Score:5, Insightful)

      by nubnub ( 795694 ) on Thursday July 14, 2005 @10:47AM (#13063512)
      This was insightful? What's a couple thousand dollar gamble for most people that might have missed Yahoo's rise to fame and fortune? Knowing what Yahoo was/is doing and how that compares to what Google is doing now shows that this might be a better bet and people are willing to sink that cash into it. Tell that to anyone that bought Yahoo! in 1999. Or 2000. Investing is about realizing gains, not about buying into something cool. A PE of 110, and the absolutely absurd market valuation Google has in a market with no barriers to entry is a really bad investment.

    • Re:Proven innovation drives it... (Score:4, Insightful)

      by Iriel ( 810009 ) on Thursday July 14, 2005 @10:50AM (#13063549) Homepage
      I agree completely on a personal level with the quality of Google's little magic shop of products, but some companies are less concerned about satellite imagery. There are plenty of companies that appear on Google Ads and also spend an incredible amount of time and money (to third parties or employees) to find a way to reach that highly prized Google PR of 8 or 9 even, because nobody completely understands how it works. All they know is that they want to be the number one result on the number one search engine.

      While this money spent on SEO isn't going to Google, it certainly drives a good amount of other business. I think the innovation drives Google, but it's ambiguity is what drives several other markets, and that impact shouldn't be ignored when some parts of the internet business still haven't recovered fully from the .bomb

    • Re:Proven innovation drives it... (Score:5, Insightful)

      by Golias ( 176380 ) on Thursday July 14, 2005 @10:51AM (#13063550)
      What is so hard to understand? Google, in a relatively short time, has been able to come to market with some amazing pieces of software that are stable, useful, and free even in their "Beta" stages.

      That third thing is what has people so puzzled. Google's most popular offerings are "free as in beer." Yes, their search tools are so popular that they are getting embedded into operating systems and browsers, but another company could come along any day now with something better and displace them just as quickly as they displaced Yahoo. For that matter, an OS company (Microsoft or Apple) or a browser team (Mozilla, Opera) might just decide that they are better off putting out their very own superior search tools as a way to set their product apart from the competiion, and the right innovation for filtering out sites who cheat their way up the Google rankings could easilly result in stealing a lot of market share away. It's hard to lock "customers" in to a free product.

      Gmail seemed like a really cool idea for about 10 minutes, until everybody suddenly remembered that we don't care about web-based e-mail.

      I look at Google and ask myself, "how are they actually going to be making money in ten years?" It's hard to come up with any kind of solid answer.

      I could totally see wanting to invest short-term in Google, simply because the waves of hype are probably going to keep their price going up for a while, allowing you to play the "greater fool" game for fun and profit. But long term? Meh. I like a lot of things about the company, but I wouldn't bet my Roth IRA on it.

      • Re:Proven innovation drives it... (Score:5, Interesting)

        by photon317 ( 208409 ) on Thursday July 14, 2005 @11:27AM (#13063881)
        Gmail seemed like a really cool idea for about 10 minutes, until everybody suddenly remembered that we don't care about web-based e-mail.


        Perhaps you don't care, but millions of people do. There are really two "classes" of email account out there. There's personal email, and there's corporate email. In the realm of personal email, webmail is the "in" thing, and will only become moreso. That's because with webmail, it's easy to change your address, make new accounts, and to keep your email alive through ISP changes, computer replacements/upgrades, and even physical moves across the country which might entail both. It gives you a floating identity out in the ether which you can always access so long as you can find a functioning web browser. You don't have to lug your laptop to a friend's place or to the cafe, just use a random machine with a browser to get your mail.

        I look at Google and ask myself, "how are they actually going to be making money in ten years?" It's hard to come up with any kind of solid answer.


        I know exactly how they'll be making enormous gobs of money in ten years. They'll have most of the first-world by the throat, in total depedence on Google Magic for their day-to-day needs related to the flow of information. Search, email, blogs, photos, video, mapping, satellite data, filtering, secure remote storage, etc. Just as the first-world has become entrenched in web culture and dependent on it, they will become entrenched in Google culture and come to depend on it as well. They're taking a pragmatic peicemeal approach to the age-old plan of replacing your operating system with something in a browser - what Netscape had hoped for so long ago (and fittingly, Firefox will help Google too). Eventually whatevfer your home computing device is (PC, game console, media center, or some hybrid thereof), all that will matter is that it has a fast net connection and a browser, and while the large content may come from varying places, the small content, the metadata, and the glue that links it all together will come from Google.

        You say the customer can't be locked in to these free standards-based tools, and that's true. But with the minds they have employed at Google, the infrastructure and highly-prized domain-specific knowledge they've built up, and their brand name, good luck to any company that wants to overtake them at their own game. It's Google's game to lose, and it's pretty unlikely that they'll lose it in the next decade.
      • Gmail seemed like a really cool idea for about 10 minutes, until everybody suddenly remembered that we don't care about web-based e-mail.

        How can you say that with a straight face? What evidence do you have that no one cares about web-based email services? Just by applying common sense you should be able to figure out that for the average user web-based mail is more appropriate and attractive. It allows for storage of a large amount of email, sortable into folders, accessible from anywhere in the world

        • Holy shit, the one joke I crack in the entire post, and nearly every reply focuses in on jumping all over me for daring to say anything bad about Gmail.

          Okay. You are cool for having a Gmail account. I'm so jealous that I now wish I had accepted one of the fifty-bajillion invites that crapflooded my inbox a few months ago. Oh, woe is me, that I must suffer along with my local e-mail client.

          There, happy now?

          Shit, it's like walking on egg shells with you people sometimes.
    • Seriously, they are playing from a stacked deck. They started the bulk of their projects before going public and have been pushing the out at a good clip.

      What happens when that pipe line dries up?

      They are a classic dot-com overvalued stock. It will come down and when it does it will come down hard. Expect it to happen after they make some big with stock purchase.

      Really they need to start buying up other companies using their inflated stock just so they can have something long term to sit on.

      They are
    • Google, secretive or not, is producing good software at an alarming rate (yes, alarming is the word to use here) and at this time should be invested in

      I will betcha a sig line that Google's total market cap drops below 1/2 of its current cap by end of 2007.

      Are we on?

      If not, how can you recommend people bet real money on this stock?

    • You are confusing value from a consumer point-of-view with that of the investor's point-of-view.

      While I don't write for the Economist, it's pretty obvious to me that it's not Google's "ambiguity" driving its value, it's Google's proven track record which is getting people interested

      And that's why you never will write for the Economist. The party will be over eventually and many people will be hurt financially. Google can not go up forever. The fact that people were eager for Google's inclusion into

      • The fact that people were eager for Google's inclusion into the S&P 500 is a giant red flag to me.

        Entry into the S&P 500 is based upon market capitalization, not Standards & Poors saying 'these are the 500 companies we think are cool'.

        That being said, i agree with your post whole heartedly.

  • CFO? (Score:5, Funny)

    by SolusSD ( 680489 ) on Thursday July 14, 2005 @10:40AM (#13063443) Homepage
    wish we had a cfo. we don even have a vending machine!

  • Lets be honest (Score:5, Funny)

    by davidmcw ( 97565 ) on Thursday July 14, 2005 @10:40AM (#13063447) Homepage
    500lbs is an awful lot of pasta

  • Damn - How do I get THAT job... (Score:4, Funny)

    by TJ_Phazerhacki ( 520002 ) on Thursday July 14, 2005 @10:40AM (#13063448) Journal
    Sounds like a ful-filling position.

  • P/E (Score:3, Insightful)

    by Citizen of Earth ( 569446 ) on Thursday July 14, 2005 @10:41AM (#13063457)
    Current P/E: 121.38. Long-term P/E: 1.00. What more do you need to know?

    • Re:P/E (Score:5, Informative)

      by Momoru ( 837801 ) on Thursday July 14, 2005 @10:54AM (#13063577) Homepage Journal
      Ok for their P/E to be 1.0 their stock price would have to NEVER change from where it is now, and they would have to start making Microsoft dollars

      The current FORWARD P/E on Google is still 45. Personally I think earnings will be lower this quarter because of so many aquisitions, and multimillion dollar $0 options the senior execs have taken.

    • P/E 1.00? (Score:3, Insightful)

      by RealProgrammer ( 723725 )
      How did you come up with that?

      Everybody knows that Google's expenses will be lower, being a pure technology company. It's a new era, and the old rules don't apply.

      Pop! [sound of tongue removed from cheek].

      Actually, I think Google's long-term stock value depends on how they spend the cash they've raised. It's the old story from the dotboom, investors are really paying Google to be their fund manager, giving them money to see who they'll buy.

      I think their performance as a tech company (as opposed to the
    • P/E is Profit divided by Earnings, right?

      • Re:P/E (Score:3, Informative)

        by NetDanzr ( 619387 )
        No. P/E is the stock price divided by earnings.

      • Re:P/E (Score:2, Informative)

        by NathanBFH ( 558218 )
        Price/Earnings ratio.

        "The price per share (numerator) is the market price of a single share of the stock. The Earnings per share (denominator) is the Net income of the company for the most recent 12 month period, divided by number of shares outstanding." - Wikipedia article [wikipedia.org].
    • Why on earth would a long term P/E be 1.0?

      Almost certainly a long term P/E would be more than one. Think about it, would you sell a company for £100 that was steadily earning £100 *per year*?!?

      In general, the price will reflect the net present value of expected future cash flows. Depending on tax rates, investor preferences and interest rates etc. this will probably put the PE ration in the 10-20 range for a company in "steady state". Which is about what you would expect see in today's markets
  • What about the 2.300 lbs of chicken, 1,600 lbs of coffee beans, and 112 lbs of wheatgrass(??)!

    David

  • Google is people not products (Score:5, Insightful)

    by cyngus ( 753668 ) on Thursday July 14, 2005 @10:47AM (#13063510)
    Perhaps reporters are looking at things the wrong way. The reason for Google's success and break neck product generation pace is the people that work for them. Maybe you should be more interested in their habits if you want to know where Google is going. More to the topic of valuation though, Google is highly valued because their growth is tremendous, their has been almost no growth deceleration, and they generate huge amounts of cash. I believe they are on course to generation $1.8B in cash this year, something very, very few companies can say. Is it worth what the stock is trading for? Clearly, no one knows, but many think it is. Google's growth will start to level at some point, but the thing is that when you're growing this fast, slowing growth down only a little later (or earlier) is going to make a big difference in absolute sales or profit numbers. So, timing of the leveling off is crucial, but almost impossible to predict.
    • To an investor a stock may as well be a baked potato. Stock prices are based solely on perceptions: it is not about what the company is actualy worth but how other investors feel about the longevity of the brand and how much are they willing to pay to add that brand to their portfolio.

      Compare the cost of Picasso's art supplies to the average auction price of his works... or the cost of designer label suit to the cost of materials plus sweatshop labor... it's all about perception and how much people are wil

  • Brand News (Score:5, Interesting)

    by Doc Ruby ( 173196 ) on Thursday July 14, 2005 @10:47AM (#13063511) Homepage Journal
    "Brand equity" represents the entire public perception of the branded product (in this case "Google" / Google's securitized equity). People think "Google" means "the next big thing" and "smart Internet entrepreneurs". So pasta consumption stories build brand equity. Which is where high PE ratios come from. Very little else can justify such high multiples, certainly not the value of forseeable future profits on such a high base stock price.

  • This IS news. (Score:2, Insightful)

    by Leroy Brown ( 71070 ) *
    500lbs is hardly anything considering all the geeks they have working for them. Or is that just between sergey and larry?

  • EPIC is Google's 10 year plan... (Score:3, Interesting)

    by Mindragon ( 627249 ) * on Thursday July 14, 2005 @10:48AM (#13063524) Journal
    http://www.robinsloan.com/epic/ [robinsloan.com]

    It all makes sense after that.

  • Re: (Score:2, Insightful)

    by account_deleted ( 4530225 )
    Comment removed based on user account deletion

  • Proven innovation? (Score:4, Interesting)

    by Anonymous Coward on Thursday July 14, 2005 @10:55AM (#13063581)
    Try one-time innovation.

    Their innovation was a search engine that didn't have NASCAR ads all over it and worked on dial up lines. That's all. They did that in like 1998.

    They've come up with nothing profitable since.

    Nothing.

    (They have come up with innovative stuff, but it's not profitable)

    Google is a big sham. Their stock isn't even first class stock. It's pretend stock. The people who have bought it don't have the voting rights as the insiders. They can't even vote those clowns out of power.

    Google is the last dot com scam.
    Short 'em now.

    • if you're going to rant, at least get the details right.

      Google's innovation was in using linking pages to rank the search results, not in providing a page that was ad-free.

    • Re:Proven innovation? (Score:5, Insightful)

      by GeffDE ( 712146 ) on Thursday July 14, 2005 @11:27AM (#13063887)
      I have no idea whether that is supposed to be a joke, or if you are actually living back in 1998. I suppose that an automated advertising service whose gross margins are as close to 100% as you can physically get is not at all profitable. Or that Google's profits are larger than Time-Warners means that nothing that they make is profitable. On the contrary: Google uses its simple, old technology as a massive cash-cow, that coupled with its killing in selling stock, is funding the development of "un-profitable" innovations. Except that those innovations are profitable. How can they be profitable if they are free as in beer? Because in Google's revenue model, the end user is NOT the customer. The sheer mass of end users is what makes Google so attractive to the customer: companies who need to advertise. Google's innovations expose end users to Google's customers more and more because end users use Google's nifty, useful innovations.
    • Their innovation was a search engine that didn't have NASCAR ads all over it and worked on dial up lines. That's all. They did that in like 1998.

      They've come up with nothing profitable since.

      And yet...I've been using Google for web searching almost exclusively since 1998. I have vague memories of using Yahoo! and AltaVista for a while, but I've been using Google's product consistently for seven years. In technology terms, I might as well just say forever.

      Even if we assume that nothing they've relea

    • "The people who have bought it don't have the voting rights as the insiders. They can't even vote those clowns out of power."

      This same structure also allows the company to focus on long-term growth, instead of having to worry about frequent changes in power due to shortsighted investors. It's the best of both worlds, IMO...a publicly traded company that's managed like a privately held one.

  • Google is people. (Score:3, Funny)

    by esmokey ( 804380 ) on Thursday July 14, 2005 @10:55AM (#13063584) Homepage
    The FA doesn't mention how much solient green the employees consume in an average month.

  • Heading for a fall? (Score:2, Interesting)

    by Durzel ( 137902 )
    Whilst Google does undoubtedly make intriguing software, it remains to be seen how long this innovation can continue.

    I would also question just how far they can take their existing product line, and how long they will remain safe from the other big players (e.g. MS, etc).

    Google Earth, Google Maps, et al are funky little things in their own right, but they are somewhat reminiscent of applications you'd expect college students to come out with. High on technical merit, low on ROI.

    Also, I think the origina

    • Re:Heading for a fall? (Score:3, Insightful)

      by tgd ( 2822 )
      So what happens with Google starts dropping location and context sensitive ads next to the google maps everyone is now putting all over the 'net because of the open APIs?

      I think the people at Google who are doing this are smarter than 99% of the people on here, and know EXACTLY what they're doing.

      Whats funny is the two examples you used are probably the most obvious areas of targeted future growth for them right now.

      The odds are the ROI on the Maps technology will be HUGE.

  • The Free Meals (Score:5, Interesting)

    by Momoru ( 837801 ) on Thursday July 14, 2005 @11:00AM (#13063612) Homepage Journal
    Is anyone else as sick of hearing about this as I am? I feel like thats all they ever mention. Granted, its a cool perk, but I'm not going to work for $50k less just to get some free food. As a programmer who sits at a desk all day, free food = free diabetes at age 40.

    Also the stock options arn't a great motivator anymore since the stock is basically priced for where Google will be in 3-5 years. To see the same return on your Google stock issued now compared to the stock of last year, Google would have to become the size of Microsoft in market cap.
    • ...and I say this as someone who needs to lose weight (and has never worked for google)

      Free meals doesn't have to mean "free unhealthy meals". I'm guessing this is especially true in an area where the average person tends to be more health conscious than, say Houston, TX (often cited as "the fattest city in America"). You don't need to eat a burger and fries for lunch every day, and maybe, just maybe you might find you feel better with an improved diet.

      But yes, them fries is damn tasty.

  • Is Google the next Netscape? (Score:5, Interesting)

    by G4from128k ( 686170 ) on Thursday July 14, 2005 @11:01AM (#13063622)
    The other front-page story on Netscape highlights the promises and risks of high-flying internet companies. In this post [slashdot.org] I argue that Netscape fell because it was so easy to switch browsers, especially when getting a new computer.

    I wonder if Google will be able to make itself sticky enough to survive any threats? Currently, Google doesn't really offer any intercompatibility advantages in the sense that a co-worker's use of Google does not influence my use of Google. And if I replace my PC, Google doesn't offer anything that encourages me to use Google on the new machine. (GMail is somewhat sticky, but is too independent of Google's core search to force people to stay with Google search)

    In contrast, I can see how MS could offer more integrative search experience where people would use MS search tools because friends and coworkers use MS search tools. If my coworker's PC is indexed by MS, my old PC was indexed by MS, and my new PC comes with built-in local/global search tools, then I'd bet a large fraction of people will switch to MS search tool regardless of Google's marketshare. Even Google's ad-words placements on 3rd party sites could be threatened if nex-gen MS server includes integrated ad serving tools.

    I hope that Google finds a way to encourage people to stay with Google even as they change PCs or interconnect with co-workers and friends. The current valuation of Google requires both high growth and low risk.

    • Re:Is Google the next Netscape? (Score:4, Interesting)

      by Electric Eye ( 5518 ) on Thursday July 14, 2005 @11:22AM (#13063820)
      That's a great post. I agree 100%. Another thing I'm beginning to question is how long their ad sales can increase. I've used their AdWords program and have helped a few other people. Overall, the expenses haven't been worth it. Also, bidding for keywords is becoming more and more expensive every week, and it's got to hit a wall sooner or later. Also, any sign of a recession or economic slow down and I could see Goog's revenue's taking a massive tumble.

      If I could afford it, I'd probably short the hell out of this stock and wait for the $200 drop. Granted, I was way wrong about this stock in the past, but $300 for an internet company is outlandish. The company is still a Wall Street darling but I'm not buying it. It's going to come down sooner or later.
    • This is the old business model, one that has shown to be successful in the short-term but I believe ultimately is doomed to failure.

      Customers like choice. Customers hate to be bullied into using something, and even worse resent using something only to find out that they are locked in and didn't realize it.

      In the big IM boom there was ICQ, then MSN, Yahoo, etc. But people found that they had some friends on one, and some friends on the other, so they would install both. However some programmers ran into

  • Overvalued Stock -- (Score:5, Informative)

    by Anonymous Coward on Thursday July 14, 2005 @11:02AM (#13063626)
    Let me offer a bit of instruction to fellow geeks.

    One way to value a stock is to compute its future earnings, discount them and figure out its value today.

    So for example, if Company X pays out $10/year, every year, how much would you pay to buy Company X today? To compute this, you do the following calculation: $10 + $10/(1+intrate) + $10/(1+intrate)^2 + $10/(1+intrate)^3 + ...

    Intrate is the prevailing interest rate. Clearly, the company has to cough up $10 for the first year. For the second year, (if int rates are 5%), the company only has to cough up $9.52.

    In this example, the value of Company X is about $210 today.

    Clearly, a succesful company will be able to pay out ever growing dividends. The confidence in growth is computed down to the P/E number, price/earnings.

    In GOOG's case, the P/E number is now 120!. This is an absurd number.

    Comparable tech companies sport the following P/Es:

    Ebay: 58
    Yhoo: 58
    Msft: 25
    Goog: 120 (wtf?)

    GOOG is probably overvalued. By a lot.

    • Re:Overvalued Stock -- (Score:5, Insightful)

      by drtomaso ( 694800 ) on Thursday July 14, 2005 @11:55AM (#13064254)
      Theres also another way to look at this. P/E is defined as "a stock's market capitalization divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period." (investorwords.com)

      Thus, we can think of it as such- how many years would it take Google to buy back all of their outstanding shares at the current market price assuming their earnings stay fixed? Right now the answer to that question is 120 years. Do you honestly believe GOOG will exist in 120 years?

      Of course, this argument assumes their growth stops and doesnt decline. YMMV. Thats why the parent poster's comparisons to similar tech companies is so poignant. During the "pop" of the internet bubble, companies with P/E of over 70 suddenly lost as much as 97% of their value (assuming they survived at all). GOOG is closer to double that.

      Innovation, nor expertise is driving GOOG up. It's 100% pure unadulterated hype. A P/E of 120 indicates a massive market inefficiency. Unfortunately for the good people of Google and its investors, the market has a nasty way of correcting itself, eventually but never-the-less inevitably. The real losers of the Dot-com days were the investors who fooled themselves into believing that rule didn't apply to them.
  • From article
    At least in part by shrewdly manufacturing a winning mystique. No outsider today can prove definitively that Google is not an office park full of geniuses who could at any moment announce, simultaneously, world peace and a cure for the common cold. That is because no outsider today can say anything definitive about Google at all. This is intentional. Google makes itself totally opaque by camouflaging itself with lots of what journalists call "colour".

    Nope. This is what is called in financial
    • If the cash flows were reasonably consistent an NPV works just fine, the trouble is everyone thinks there is a mountain of money in the future that may or may not be there. Taking the mean is worthless... to your point, Google will either be a the basis of the global economy or a nobody in 10 years, it won't be the average of the cases unless it's heading up or down between them (at which point the game is over to buy it anyways).

      So the valuation is a sort of mathematical expectation where the payout is hu
  • So, Google is sort of an interesting example of a company that has purposedly constructed its corporation for risk taking. How?

    Throughout its life, google has been structured in a two tiered stockholding structure, Class A and B shares. One class (I think it's the A) gets to vote at board meetings, the second just gets dividends.

    If you've ever worked at a startup, this is a pretty typical structure for startups. There are preferred shares, which your financers hold, and regular shares, which you as a f

  • Intentionally ambiguous?? C'mon, everyone should have realized by now that Google is an arm of the US National Security Agency.

    They continually index the Web, and monitor our searches for intelligence purposes. Google mail and Google groups expand this capability substantially. And of course Google Earth allows them to monitor what IP addresses are imaging what portions of the globe.

    They are fighting communism/fascism/terrorism/narcotics trafficking/internal dissent/etc. by advanced search tecnology an

  • Pride Cometh Before the Fall... (Score:3, Informative)

    by CodeBuster ( 516420 ) on Thursday July 14, 2005 @12:53PM (#13065002)
    Does anyone else remember the glory days of Netscape when they had a private on-site sushi bar, full time masseuses, and a nose-bleed P/E ratio? I do not own any Google shares right now, but if I did I would sell them after reading something like this, or in the words of Joseph Kennedy, "When the shoeshine boy starts giving you tips, it is time to get out of the market."

  • Security through Obscurity (Score:3, Interesting)

    by Mingco ( 883841 ) on Thursday July 14, 2005 @02:11PM (#13065947)
    If at any point Google announced to the world, "Hey look, we now have the largest collection of the most talented software engineers in the world. We have control over a very important and difficult to develop function that can be at the heart of every computer system in the future. By leveraging our presence across all OS platforms and across international borders, we believe that distributed computer and information access over the internet will render OSes into a low margin commodities market like hard drives and memory chips. Our plan of attack is to..." ...then Microsoft will surely take notice and turn their entire battleship towards Google and crush them as they did Netscape.

    If, instead, they periodically leak many potential products for users in a beta program, each of which has revolutionary and potentially devastating implications for Microsoft, then Microsoft cannot bring to bear all of its laser-like competitive powers against those betas as they could against a concrete, real product strategy.

    If, instead, Google gathers user feedback from their betas, and quietly works on improving the successes, they can release a product that has features that are difficult for even Microsoft to copy and compete on quality, and has very high user satisfaction. Then they can leverage the networking effect of positive word of mouth from users in their beta program to establish a very loyal and large satisfied user base before Microsoft even gets an inkling of what they're up to.

    Google, like Netscape before it, has the *potential* to change how we use computers in the future. This is contrary to Microsoft's best interests. However, because Google is not in direct competition with Microsoft, but rather can grow around, and eventually subsume desktop functions, it is very difficult for Microsoft to directly attack Google. If, on the other hand, Google has clearly laid plans of attack, and product and profit plans clearly marked, then Microsoft can herald considerable force in a short amount of time to directly compete against whatever business model they have laid out, whether it's profitable or not.

    Think of Microsoft as the Redcoats in Redmond. They have a very good regular army and have won every war they have been in. If you announce that you have an army and assemble one as such, they will assemble a larger one and destroy it. If, however, you use guerilla tactics and maintain an information network that is more aware of their position and movements than they are of yours, then you can win the war with even an inferior force.

    Not that Google has an inferior force, but even with its high valuation, they would be hard pressed to win any war where dollars were being attritioned.

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