Saturday, January 13, 2007

GOOG >= MSFT

I am the first to agree that all of the continuing Googology (as I like to call Google analysis) is starting to get tiring. But I have been mulling on something for a couple of months and think it would be useful to through it out there. When Google IPO'd and everyone was running around saying it was overvalued, the makret actually had a value set for the leading web portal: Yahoo!. And Google went out the door at half the valuation of Yahoo!. Hindsight is 20-20, but even back then it was clear that Google was going to very quickly outpace Yahoo!.

Today, a lot of people are saying that Google is overvalued. The market, aside from whether it is rational or irrational, has already applied a value for the pre-emininent software company of the microcomputer era: Microsoft's market cap is $300B.

Google cleary is the pre-eminent Internet company of our time, and it's market cap is only $150B. By financial metrics, the supposition that Google will soon equal Microsoft is ludicrous given Google's inflated value relative to earnings; Microsoft's P/E is 26 with $44B in revenue, while Google's P/E is 64 with a mere $6B in revenue.

But the way I see these numbers, Google only needs to double revenue to $12B and maintain its current P/E of 64 to equal Microsoft's market cap. I am not saying that all of this makes sense, but the market has spoken.