Friday, September 30, 2005

Google in S&P 500?

Google was up today 2,2% or $6.14 to close at 316.46 at rumors that they will be added to S&P 500. Colgate has been bought by Procter and Gamble, which leaves potential room for Google. Being in the S&P 500 means, that a lot of fund managers will need to buy Google shares for their massive portfolios, since a lot of them track their fund towards the S&P 500. So what most of them do is basically own whatever is in the index, and then just make some different investments that they believe in. This way there is a lot of buying of a share, when it enters the index, because the managers need a certain level of the stock for their fund. Apparently the rumors that Google could be added to the index has spurred some buying, which has led to the higher price.

Does the fact that Google in after ours trading is down to 312.40 mean that it did not get in S&P 500? I'll get back on this!

Yes (or no), Google didn't make it this time. Believe me, its just a matter of time. Google will enter the S&P 500. Some say within a year, some guess between Christmas and New Years. But when it happens, you can be sure, the stock will go up.

Thursday, September 29, 2005

Motley Fool: 3 Giant-Killers to Watch

I tend to be optimistic about Google's future and therefore also positive about Google as an investment opportunity. However, no good decisions are made without considering both sides of a story. This also goes for investment.

That's why I want to quote this great article from Motley Fool, which mentions a possible threat to Google. You can be sure, I am going to spend some time checking out Wikipedia in the weekend!

To read the whole article - click the title of this blog post.

"Giant No. 2: Google
Once upon a time, a search engine with an odd name seemed to come out of nowhere. Suddenly, the word "Google" became part of common speech. It's a giant now with a capital G. At my last check, Google shares were trading at about $300 a pop, giving it a market cap of a whopping $84 billion. At the moment, most people view it as a clear Internet winner, expected to win in just about every area it touches.

Is Google invincible? Of course not -- no company is. However, given Google's search expertise, its killers may not be Internet heavyweights like Yahoo! or Microsoft. I had a recent chat with David Gardner, and he theorized about a candidate that could possibly cripple Google in search, where it is strongest: Wikipedia -- the information clearinghouse run by the nonprofit Wikimedia Foundation.

Quietly, stealthily, private Wikipedia has amassed a wealth of information through the power of community, becoming an "open source" answer to traditional reference material. People pull from their own expertise to update Wikipedia's entries, making it the major Internet encyclopedia -- and it's free of charge. It recently became the most popular reference site, with traffic up 154% in one year, according to Internet monitoring firm Hitwise.

Indeed, when you're looking for a specific answer to a specific question, a definition of a term, or such, Google searches can at times feel like looking for a needle in a haystack, whereas Wikipedia doles out instant answers. Ouch."
Source: Motley Fool

Wednesday, September 28, 2005

Motley Fool: Has Microsoft Lost Its Mojo?

A really good article if you are an investor in Microsoft or are considering to become one. Melanie Hollands covers Microsoft's development of OCF (Operating Cash Flow) since 1999, which hasn't changed much. In the same period MSFT shares are down 40%.

Personally I think, that their OCF might increase when the new operating system Vista is shipped late 2006, but if it is enough to start calling Microsoft a growth company again is hard to tell. Also their success with their search engine will be of influence to this.

Tuesday, September 27, 2005

Happy 7th G-day!

Happy 7th G-day Google! Wauw - the things you have accomplished in your short life! Already the worlds most valuable media company. Just imagine the next 7. What will you look like at 14th? What will the web look like? Could Google be the most valuable company in the world by 2012?

How will Yahoo! Google and Microsoft be competing in 2012? Who will be the top dog by then? Still Google, one of the other players or an entirely new competitor?

More posts this upcoming weekend!

Saturday, September 24, 2005

Will Google hurt Microsoft with free software?

Google relies on its search ad model to drive huge revenues from its widely used search engine. The same business model is used when expanding into new areas like Gmail. When you use Gmail you often get some rather relevant text ads next to your emails. Are these intrusive ads? Well it depends on who you ask. Personally I see them as relevant content, a really nice feature actually!

This business model binds everything that Google does together. So when Google is launching new products and tools, they are not just diversifying the business away from search. No, they are just creating new ways to expose their clients ads next to relevant content. The search algorithms make sure, that it is the right ads shown at the right and relevant places. This keeps clients happy, because they get relevant business leads. It keeps the users happy, because they get relevant ads instead of being exposed to boring or annoying mass communication. Some of these ads actually give you exactly what you were looking for - the way ads should work!

No doubt it is a really good business model. The same model that made Google buy, so that content like this blog, could have Google's ads next to them. The ads can vary a lot from who is looking at them. The country you are in is just one of the factors, that determine which ads you get. Google is already gunning for Microsoft. Sidebar is aiming at the desktop - Microsoft's very domain. Or so it used to be. Google is getting closer to the holy grail of Microsoft - no doubt it has Microsoft scared big time. And Microsoft should be scared. This is the first company that really has a good chance at hurting the software giant big time, and Microsoft knows it.

Without the dominance in Windows and Office and the revenues from these - Microsoft would be crippled. Its the cornerstone of the cooperation's success, and its capabilities of leaping into other product areas like mobile, online and gaming. But what happens, if Google decides to distribute free software, because they actually could make a profit from it? Surely software is extremely expensive to produce, but Google also make an extreme amount of money on their ads. If Google were to hand out free software, surely many would neglect paying Microsoft. Also if Google were to make it open source, they would actually get a lot of free help in producing this. It could even be based on Linux or some of the other alternatives to Microsoft today. Imagine the impact on Microsoft! Imagine the impact on the software industry!

Google and Microsoft are both making sure, that the software and the online industry are merging, because both are working their way into the other industry. Google is currently dominant in the online industry, Microsoft is in the software industry and has been for decades - one player will be dominant in the new merged industry in a couple of years from now. I think that free software is Google's chance of gaining leadership, it certainly would hurt Microsoft severely. Microsoft's chance is gaining leadership in search, before Google can finance free software. But with the current status of market share and product quality in search, I wouldn't be betting my money with Microsoft.

Thursday, September 22, 2005

Free Google Wi-Fi sponsored by local ads?

Activity in San Francisco Bay Area and several pages on the Google homepage indicate, that Google is going into Wi-Fi in one form or another. Some analysts suggest that this is far from their original search focus and potentially also a quite expensive area to get into. No doubt, it will take some investments, but I don't necessarily see Wi-Fi moving Google away from search. Search is in Google's core, and I believe in everything that management considers. Just like Gmail, where the whole business model is serving up relevant ads next to your personal emails. Yes, mail didn't initially have much to do with search, but when Google crawls your messages and serves ads next to it, they are using their search technology - capitalizing on both the technology and the sponsored links bought by advertisers.

In my opinion Google won't necessarily be planning Wi-Fi spots to compete for the dollars, that people pay for access. More likely Google is planning to integrate their local search efforts - one of the new big areas of search - and more than anything else their local search ads. This could turn out to be such a rich revenue stream for Google, that they will offer the Wi-Fi access for free.

Monday, September 19, 2005

Forbes: Potential AOL-MSN deal wouldn't hurt Google much

There has been rumors lately, that MSN would merge with AOL to create a larger online unit with more search queries and more market power in general. I never liked Time Warner merging with AOL in the first place. I Always preferred Yahoo!s open approach to all potential content providers compared to the "forced marriage" type of deal of AOL Time Warner - where they did combine eyeball owners with content - but also excluded themselves from worker with the vast majority of content owners. But the fact that AOL and Time Warner weren't a perfect match, doesn't mean that AOL and MSN is.

Combining MSN and AOL would hold some advantages but also disadvantages. Merging cultures and mindsets are never easy. AOL is on the defensive with other type of Internet Service Providers gaining market share. I just don't see these two already challenged businesses in a merged unit being able to compete with the dynamics and aggressiveness of Google and their superior product - or Yahoo! for that matter.

Check out the article - it is a quick read. Amongst others they mention, that AOL replacing Google with MSN would only impact 2-3% of Google's operating profit.

Saturday, September 17, 2005

Yahoo!'s position in the search wars

Yahoo! now doubt is number two in search usage after the clear leader Google but nicely ahead of Microsoft's MSN. Back when I was working for Yahoo! around 2001 the company realized that Google was a threat. Something had to be done.

Google had found the formula for monetizing their widely used search engine after looking Overture over the shoulder. Overture invented the paid search links, but more and more people were using the widely popular and superior Google. Overture had the paid search technology and the customers and Inktomi, that before Google had supplied Yahoo! with search results, had some of the technology. Both companies amongst others were bought by Yahoo! to rampen up their search efforts, and start competing head on with Google. Yahoo! now also became a search company. The year was 2002.

No doubt Google has a clear lead in many areas especially in usage. However, people who really understand the technology say, that Yahoo! has made more hard core advances than Google the last year or so (mentioned in an earlier post). From an investment point of view, my point is, that if Yahoo! can leap past Google in search PLUS have so many other profitable business areas as they do, then Yahoo! could once again become a Wall Street darling and post great gains to their investors. But before this can happen - Yahoo! needs to get ahead of Google and the public needs to experience/perceive this as well. Also Yahoo! is running out of time. Two years ago they were making more than Google, now Google is making almost twice as much as Yahoo! on EBITDA and Google is growing faster. So in the not far foreseeable future, Yahoo!s research and investment funds are going to be far behind Google. In that scenario, it should not be difficult for Google to further secure their by far number one position in search usage.

So can Yahoo! do it? Well, it is going to be one of the focus areas of this blog, so that we can make the right choice as investors.


A great blog written by a frustrated Microsoft Employee. The blogger wants Microsoft to once again become a lean, mean, customer pleasing profit making machine. As you can read though, this is far from the truth today. The blog also holds links to great current articles written about Microsoft.

Happy reading!

I will also make a permanent link to this blog.

Wednesday, September 14, 2005

Yahoo! let Google in the game

Unfortunately for Yahoo! they slept during class just like Microsoft, when talented young Google showed up on the search scene in September 1998. Maybe that's the wrong term, it was actually more like they were awake and invited the new classmate welcome. Back in those days, search was just something you should enable as a portal, but not really so important, that you would necessary create it inhouse.

Yahoo! bought search in town, I believe it was Inktomi back then, which was later acquired. Google came along and were setting new standards. Yahoo!s legendary founders David Filo and Jerry Yang liked what they saw in Google's search quality and even encouraged Google's founders Sergey Brin and Larry Page to start up Google as a company and expand their search engine. Yahoo! even helped finance the two search engine founders with venture capital. As a Yahoo! shareholder I just didn't quite get it. Since search was the number one activity on Internet from the very beginning of graphical WWW around 1994 and still is, it just seemed dangerous to let someone else become a leader in this category. Not that Yahoo! was doing search themselves, as mentioned they were buying the service in town, but why help someone, that could become a big name and potentially expand to other areas? Obviously easy to say today, but I remember that specific feeling and a sense of fear for my Yahoo! investment.

Google now has a market capitalization of $84 billion, while Yahoo! stands at $47 billion. Google has exactly expanded to other areas - Gmail, Froogle, Google News, Google Desktop, Google Earth and many more (Google is King Of Beta;) putting Yahoo! under a lot of pressure. It really must feel bad having helped Google to start out, and then be overtaken. Google however, was also clever and lied about intentions. Eric Schmidt kept saying that Google would solely focus on search - always - yeah right ;). Maybe you can tweak it and say, that all their products are in fact search related - Gmail searching through your mail and serving relevant text ads. This way everything soon becomes search related.

Today these two search players are #1 and #2 in the game - with Google as a clear #1. Yahoo! is trying hard to catch up, and people familiar with the technical aspects of search say, that Yahoo! has made more hardcore advances than Google the last 1½ years. Amongst others:
  • Enabling RSS and XML
  • The recent announcement of 20 billion odd webpages indexed while Google is at 8 billion
  • Audio search
  • Video search
  • Personalized search

Google has spend a lot of their time going into the usual "portal products", which might have taken focus of some areas of search. Apparently they still spend 70% of their time improving their core search, but it will be interesting to follow. More important than true search quality is though perceived quality. As long as the public perceive Google to be the best - they will use Google. However, long term perceived quality should follow true quality.

Tuesday, September 13, 2005

Forbes: Microsoft's Midlife Crisis

I read this article on today. Great insight into Microsoft's challenges as a large cooperation. Having worked at Microsoft for 1½ years I do recognise several of the issues.

Before I go any further, let me say, that I have great respect for Microsofts achievements, its challenges and their CEO Steve Ballmer. His live performances is something everyone should experience at least once in their life. Steve Ballmer is FANTASTIC on a stage. The same enthusiasm you hear about, when he throws chairs through offices and wants to "reduce" competition (knotch knotch) - the same ausumn enthusiasm just in a much more positive way he delivers when he gives a speach - respect Steve Ballmer! However, the large cooperation calls for a lot of administrative tasks - any 90.000 employee company without that demand?

This is where Microsoft's challenge is - its still dynamic, but not as dynamic as say Google or Yahoo!. They have a much smaller focus area, which means that top management is a lot more focused. Maybe Google and Yahoo! will have this problem at a later stage.

Monday, September 12, 2005

Google back above 300, options and valuation

Lets not forget why we are here. This blog is about how to invest in the so lucrative search industry. Therefore it is nice to see Google back above 300 - welcome back! When the share goes up - so does the options. It depends which options you are looking at. I only consider call options, which is the right to buy the share at a given strike price before a given date. The opposite is a put option - the right to sell, also at a given strike price and before a given date. You would normally buy put options, if you think a company is going to fall in value. Call options are when you believe the share is going to go up.

Options trading is highly risky and should be done with great care. You can be right about a stocks direction, but wrong in your timing. If your timing is off - you loose everything. If you buy a share instead of an option - you only need to be right about the direction - you have better time. However, with the risk comes a reward, when you make the right calls. Today when Google shot up 3.56%, certain january 2007 options went up with 15%-20%. That is a nice return on investment for a single day.

A lot of people say that Google is overvalued. Is it? Personally I don't think so. You have to look at the value behind the company. How much are they generating in revenue are they growing? I like to use EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) on a quarterly basis. It says something about the companys ability to generate current and future revenue. In growth areas like the search industry the quarter one year ago don't mean much to me. Instead I take the last quarter and time it with four. This is how much the company is making EBITDA on a yearly basis. You take the valuation of the company (market capitalisation) and divide it by the EBITDA and you have how much you are paying for $1.- EBITDA in the company - also called P/E (Price/Earning).

Certainly Google has gone from an IPO $85 to $309. In the same time Google quarterly EBITDA have risen from $255 mio to $590 mio. Yes, the stock has gone up more than EBITDA, however, at the same time Google has really made a gap to Yahoo!s EBITDA, which currently is at $368 mio. This rightfully puts a premium on Google, since its the top dog in the industry. Top dogs have more money for research and improvements etc. Even before Google existed - do you remember how Yahoo! left Excite, Lycos and Infoseek in the dust? Also rather important Google is currently growing EBITDA at a rate of 112% yearly, while Yahoo! is growing the same number with 57% per year.

Google P/E at the moment is 36,5 while Yahoo! is 32,5. So you are almost paying the same for one dollar in earnings in the two companies - despite the fact, that Google is growing almost twice as fast. Wouldn't you rather want to own a piece of the faster growing company?

When this is said, Googles CEO Eric Schmidt has mentioned, that current quarter might not excactly hold the same growth as earlier quarters.

Sunday, September 11, 2005

Top Dog Google

I am new to the blogging sphere, but feel I have a lot on my mind. Today I will give my thoughts on the leader in the game - Google.

Google - the aggresive gazelle.. lots of ambition.. lots of balls and with a superior product. What I really like is the fact, that they have the guts to aim directly at Microsoft with their guns. Its courages - and personally I believe they can and will win the battle. Their great advantages today are:
  • The best and most popular product in the most profitable area on the web by far - search
  • A superior, more clean and extremely strong brand
  • More search revenue hence more money for research and product improvement than any of the others (but can't Microsoft just take lots of their millions and outspend Google? No - its not just a money game - top engineers don't come easy and recent events clearly show, that talent would rather Google than MSN (more on why later). Also a lot these top search engineers are working at Yahoo! But hey - if you (Google) have the best product, and more product specific revenue to improve it than your competitors - you are pretty well of - and that is excactly what Google is today!
  • An organizational mindset saying search first - all other products are build around this - to place the most profitable ads of them all - sponsored links. Having this in the managements attitude in everything they do just make them that more clean cut and focused on the task. A task which is necessary to create the greatest revenue stream of them all - sponsored links next to the most widely used products in the world. These products right now webbased but certainly moving into software, and thereby becomming an even greater threat to Microsoft
Possible threats:
  • Arrogance - Both buyers of Google's product Adwords, media using Adsense and other interest groups have experienced Google's arrogance. It probably comes with the territory of being the worlds most valuable media company and only 7 years old. Plus probably being the company with the biggest chance of outgunning Mighty Microsoft. Also they have never experienced crisis and hard times - it is probably hard not to be arrogant at Google. However, arrogance has crumbled many.. I believe The Roman Empire was one.. just a small example ;)
  • Yahoo! has made many advances in search and are not that far behind Google in many areas and in front in some - if only the public knew ;)
  • Microsoft certainly have a lot of products to integrate MSN search into

Personally I see Google as the leader and most likely "winner" of the Search Engine Wars. Winner defined as the future market leader. There will always be several important players in the search engine industry. The money is too great not to have several contenders and human nature and different tastes will help several engines to have enough market share to be profitable. Google is where I recomend people to invest their money today, and it is where I personally is most aggresive.