Looking for lower highs and lower lows from GOOG from here on out (10-11-2006). The stock spent only one day, Wednesday the 10th, trading above its July peak of $424 (after wich it declined to $370). It's still expensive on an earnings basis, with a traling P/E of 62. But the real question is where the revenue growth came from. And the YouTube acquistions gives us the answer, "nowhere." Did GOOG grossly overpay for YouTube? Relative to revenue it's hard to say, b/c YouTube doesn't have any to speak of. It's an application fraught with copyright danger that had tremendous buzz . But Google's model is essentialy the same, ad revenues from search and other customized ad solutions. That might work with YouTube, especially if YouTube syndicates content from estabilished Media providers. But how much potential revenue are we talking? Google didn't mention any of that in their announcement of the YouTube acquisition. This leads me to believe they made the mistake a lot of investors made in the tech bubble: paying for eyeballs and buzz. The company hasn't made a lot of mistakes in the last few years. But this looks the first obvious one to me, at least from a business perspective. It simply doesn't ad revenue. There's no evidence that targeted advertising to YouTube's community of users will yield up great revenue growth. Some maybe. But if the buzz around Web 2.0 starts to get louder, Google will start to look less like an innovator and more like MSFT, an established player with deep pockets looking to make acquistions rather than grow organically. Not a bad strategy for a maturing company. But mature companies--and I know it's controversial to say Google is a mature company, but it's business model suggests to me that it might be--a mature company doesn't typically command the kind of valuation Google currently sports. Then again I could be insane for going agaisnt the Internets bluest blue chip. And it would take a lot to see the stock fall apart...a lawsuit against YouTube perhaps, or just a wider sell-off in the markets, or an EMP blast over Tokyo showing how ephemeral the Web really is. But even if none of those things happen, there is always the chart, which suggests investors are moving on from Googles story...and large institutional holders sitting on sizable profits will be selling into bouts of strength, while the general trend is down. At least that's how it looks from my couch tonight.
$426.5 (10/12/06)
