Saturday, February 18, 2006

Google Goulash

It is amazing how quickly sentiment changes. After being the Wall St darling for 12 months Google is now the number 1 bear target. All because of an earnings miss due to a high tax rate. Suddenly GOOG is only earning $8 this year and $9 next! Suddenly click fraud is going to spell the end of its business model and Yahoo! and Microsoft are going to eat it alive. According to Barons Google is going to somehow only earn $6 this year, only slightly more than 2005, and the share price is going to halve.

Google's $350 share price makes it an easy target for headline-grabbing journalists. Would it make such good headlines if they did a 10 for 1 split and the SP was $35? Would it make such good headlines if the market cap. was less than $100 billion?

What I am trying to say that is that the SP price and market cap. that the journalists keep going on about are not very important. What matters are the PE multiple and the growth rate. Analysts making the bear case talk about a trailing PE over 70. They don't talk about a 2007 PE of 30.

Click fraud has been around as long as Internet advertising. As Internet usage grows so will click fraud, as will revenues.

Yahoo! and Microsoft! have been competing with Google for years but Google has kept on gaining market share.

There has been talk of a search keyword price bubble. And the problem is? High demand leads to high prices. As long as Google remains the default search engine worldwide then the prices will stay high.

I have not sold my GOOG shares. I will not be buying more as I do not want to under-diversify my portfolio but I think GOOG has as much chance of gaining 50% in twelve months as any of my other holdings.

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