MSFT/YHOO...ho hum.
Notes from the Field ~ DATELINE...May 2, 2008...by Tom Heysek
"Head-ware"
Company Tags: GOOG, MSFT, YHOO, SOHU, BIDU, SINA
"Like watching two dinosaurs mate"...is the latest homespun analogy to emerge on the Internet to describe the Microsoft / Yahoo merger. Google, by doing nothing, comes out on top, as its two nearest competitors, together, have half the market share.
Internet Searches in March (source: Nielsen Online):
Google: 4.8 billion, up 26% (y-o-y) (mkt shr = 59%)
Yahoo!: 1.5 billion, dn 5% (y-o-y) (mkt shr = 18%)
MSN/Windows: 979,671, up 37% (y-o-y) (mkt shr = 12%)
All Others: 855,922 (mkt shr = 11%)
Google needs to recognize that its quarry is not MSFT/Yhoo, but overseas markets. That puts Google on a course to be compared with the 3 most prominent China internet companies. With China destined to be the largest economy in the world in 3-5 years, how might such a comparison look?
SOHU BIDU SINA GOOG
Price $75.44 $370.00 $47.20 $593.08 (5/1 prices)
Mkt Value
...in MM $2,867 $12,580 $2,596 $185,634
Revenues
...in MM 241 292 246 18,120
Oper'g Mgns 25% 30% 21% 30%
EPS $1.34 $2.84 $0.97 $14.23
In fact, Google appears undervalued in relation to the Chinese internet companies. GOOG's revenues are about 70 - 75 times larger than SOHU and SINA, yet its market value is a lesser 65 - 70 times larger. GOOG's Gross margins approximate SINA's, yet its operating margins are 100% or more of all three Chinese Internet companies. Finally, Google's statistical valuation ratios (Price Earnings and Mkt Value-to-Revenues) are all lesser ratios.
Conclusion: Microsoft and Yahoo are becoming increasingly irrelevant in deriving relative value for Google...and looking to China leads to an analytical conclusion that Google remains undervalued. These valuation ratios do not turn negative for Google until GOOG's stock price surpasses $700 /share. This benchmark number assumes no changes in the stock prices of the 3 Chinese Internet companies. If the Chinese Internet stocks continue to appreciate in value, the Google benchmark number also increases proportionately, possibly to more than $800 a share...at least, that's what the numbers would indicate.
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