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In August of 2004, during the Google IPO, I predicted that Google would surpass Microsoft in market capitalization in 5 years. At that time Google stock was $85/share giving it a market capitalization of $26 Billion, while Microsoft had a market capitalization north of $300 Billion. Since that time, Microsoft’s stock has actually taken a slight hit while Google’s has skyrocketed.

Today

Currently, Microsoft’s market capitalization is $280 Billion. Today, Google crossed over the $600/share mark for the first time giving it a market capitalization of $190 Billion. Google has already surpassed some of the largest corporations such as IBM, Intel, and Oracle in size. As far as I can recall, only Microsoft and Cisco are larger technology companies.

2008

Analysts are predicting that Google will pass $700/share at the end of 2008.

2009

To fulfill my prediction, by August 2009, and assuming Microsoft’s market capitalization stays between $280-$300 Billion, Google has to reach between $900 and $1000/share to surpass Microsoft as the world’s largest technology company.

Is this possible? I still think so, but a lot of things have to continue to go right.

  1. The economy has to remain, somewhat healthy. While advertising is mostly recession-proof, marketing and advertising dollars are usually affected when the economy is struggling. This means it may be difficult for Google to continue charging high fees for ads during a recession. They would have to make up for price cuts with increased volume.
  2. To increase their volume of advertising, Google can expand their advertising reach. One is to launch the rumored “Gphone” product line to extend from desktop computers to mobile devices. Almost everyone carries a cell phone with them all the time. This would increase Google’s ability to profit from AdSense and AdWords when people are on the go. Second, Google is already moving from the web into old-media such as print, radio, television, etc.
  3. Google needs an alternate stream of income besides advertising. Yes, the majority of their revenue will always come from advertising 1. But a move into corporate and enterprise will help to insulate them from fluctuations in the economy and provide them with security for future competition. They are already doing this with Google Apps, where you can pay for additional storage and customer support. Currently, Google charges only for the enterprise edition and offers the personal edition for free. (I believe the enterprise and personal editions are identical, just differing on storage quotas and customer support). As storage needs increase, users may be interested in upgrading to the paid version. The Google Apps revenue model is to give the service away for free, but to charge for the storage. This makes sense, as Google has the world’s most-efficient storage platform — and can rent out spare storage space. I can envision Google selling spare compute cycles (cloud computing) in the near-future.

Conclusion

If my near-term prediction is correct, and Google stock can grow from $600 to $1000 a share in the next two years, a growth rate of greater than 30% a year, then that’s a pretty exciting investment. After that, I think Google reaches critical mass and their growth rate begins to taper off 2. So while you may double your money in several years, you can no longer get rich off Google stock. If you think Google stock can grow 10x, forget it. You must invest in small or medium caps for that.

Someone made a prediction, last week, that Google can hit $2000/share in 20 years ($750 Billion market capitalization). And possibly, even later, predicted that it would be the world’s first $1 Trillion company. That caused quite a stir in the news. While that seems somewhat probable in the far future, I’m not going to make any predictions on that.

References

  1. Online advertising in the U.S. reached $10 Billion for the first-half of 2007. The prediction is that online advertising in the U.S. will be between $20-$21 Billion for all of 2007. Google earned $1.9 Billion out of $7.5 Billion in revenue in the first half of 2007.
  2. Google snags 40% of all online advertising in the U.S. Look at Google’s growth rate! Although, you can see their growth slowing Google has defied the odds, because they are such a large corporation already.