Google at $1000/share

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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.

7 replies on “Google at $1000/share”

You’ve hit the nail on the head Jesse. The growth of Google is slowing, yet their overall growth is steady; all while attracting and keeping their customers / partners via great apps, storage, and customer support. I see great things for Google down the road… and possibly in conjunction with Apple (or so one can hope). I just wish I had bought stock in Apple and Google several years ago… oh well. Great article!

“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.”

So Google is going to taper off in about two years? No way of getting 10x returns on a company that is based on non physical items like advertisement?

I know this small insurance company back in the 1990’s. It’s stock was at 7,250.00 a share on 31-Jan-90. Today it’s 132,000.00 a share at 2-Nov-07. Less than 20 years has past. I would say it got that 10x return and more. Sure Google is not as diverse as Berkshire Hathaway’s investments. But Hathaway doesn’t have the gphone platform.

Peter,

You are right, Google does have a long-term chance to go 10x, but as their current market capitalization is over $220 Billion, it will be extremely difficult. Ten times, would make them $2.2 Trillion, by far the largest company ever.

It’s not the price per share that matters so much as market capitalization. Google actually has a market capitalization larger than Berkshire Hathaway right now!

But if anyone has a chance to go past a $1-2 Trillion, it would be Google. However, I can’t predict that far out. If it’s just a pure numbers game, for Google to grow 10 more times, it would require a constant growth rate of 30% for a little over 9 more years.

The article about Google hitting $2000 a share in 20 years, and a market capitalization of $625 Billion, does not seem unreasonable. At Google’s closing stock price is $725 today, that would mean only a 2.75x in 20 years, or a constant growth rate of 5.25% for about 20 years. Not impossible, but Google valuation is high right now.

It’s difficult to predict that far out, and a lot of things can change — management, direction, execution, strategy, valuation, etc. In my opinion, it would have been great to invest in Google a few years ago; however, at this point in time, it is easier to make 10x your money in small cap companies than in Google.

MUHAHAHAHAHA – Your bias appears to clearly be displayed in this supposed hypothesis of an article… You say Microsoft’s market capitalization is at 300 billion and growth seems to taper off. And you also expect Google to grow at more than the expected growth rate to surpass Microsoft. That’s a good expectation, except, what you did not get is – when one software does not sell as well, it directly reflects on the others too… And the largest number of Google user’s are Microsoft Windows users. (You forgot that too) How come?!? The more Microsoft grows, Google is likely to grow…

#5 and #6 Harshavardhan –

Due to the rules of large numbers, most companies cannot grow quickly after $200-$300 billion in market capitalization. Google had crossed over $200 billion a few months ago. Obviously, we’re in a recession so the tech market has had a pull back.

Google has been growing much faster than Microsoft the past few years, why? Google has grown similar to Microsoft in its early years, but you’re right they are slowing down now. But they’re still earlier on, about 10 years old vs. Microsoft 32-33 years. So they’re still a little smaller, and the growth rate percentages are still higher — doesn’t mean more money, higher percentage. But both companies are doing well.

At this point, Microsoft is more mature and can weather recession a little better than Google, as Google is at the forefront of innovation. Innovative companies are higher risk.

Google is not dependent on Microsoft software for it to be successful. Google makes the majority of its money thru the Web. Any operating system that has a modern web browser should do.

You seem to be a Microsoft-junkie?

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