Saturday, October 29, 2005

Google Growth Compared To Yahoo! Growth

Both Google and Yahoo! posted Q3 results last week. I don't compare with Microsoft here, because I generally believe, that Microsoft won't succeed with its current plans. I don't think that Microsoft will become a larger player online, in fact as Henry Blodget recently did a piece on (see my post the 7th of October), Microsoft is still after ten years of trying falling behind the current two leaders Yahoo! and Google. Also I believe that Microsoft's software domination will diminish, as more and more software will be served over the Internet. Especially now where Google is planning to offer free Internet, first in the sense of Wi-Fi in San Francisco, but I am sure that it will offer this across North America and then later the rest of the world. If they can make a business out of it in San Francisco (local ad + other ad sales > cost of delivering access) I am sure, they can make the same business model work elsewhere. Especially when access costs will be working their way towards zero cost. Eventually free wireless Internet to the civilized world will dramatically change the desktop model for software usage. As I earlier wrote: Microsoft has never been an innovative company, it has just had a strategic advantage in owning the operating system - the rest is sloppy business they still have made a fortune out of, since they could hold competitors out. This old school monopoly will not stand the wind of change brought about by Google, Sun Microsystems, Yahoo! and a lot others.

Maybe I am being too hard on Microsoft, but I just don't believe in their future, and neither does the stock market. Alright that was Microsoft out of the equation, lets have a look at the last few quarters growth in Yahoo! and Google.

EBITDA (Earnings Before Income Tax Depreciation and Amortization) is generally a good way of looking at a company's current and future ability to generate revenue and profits. That's why I focus on this number. Also I find it very reliable at determining the development of the share price of a company. Let's have a look at the quarterly EBITDA numbers for Google and Yahoo! in 2005.

It should fairly be mentioned, that Yahoo! last Q4 had a Q over Q growth from Q3 on 25,8% while Google "only" grew 17,8%. So apparently Yahoo! grows faster than Google during Q4. However, since then Google has shown significantly higher momentum during 2005 than Yahoo! so this might change in Q4 2005.

When this is said my personal conclusion is, that obviously both companies high growth is coming down. But very importantly: Although Google is growing faster than Yahoo! - Yahoo!'s growth is coming down faster than Google's. From Q1 to Q3 Yahoo!'s YoY growth came down 16 percent point (64% -> 48%), while Google's only came down 6 percent point (115% -> 109%).

Then when you compare the EBITDA P/E (Price/earning, how much you as shareholder pay per dollar of EBITDA when purchasing the stock) of the two companies, I must say, that the premium you pay on Google as the faster growing company with today the far superior R&D budget and probably also brand value - I think that Google turns out to be a better buy. With last Fridays share prices the EBITDA P/E for the two companies is as follows:

Yahoo! EBITDA P/E: 32,6
Google EBITDA P/E: 37,2

Google is growing more than 100% - Yahoo! is growing less than 50%. Google might actually also have the better brand value today. Would you rather own shares in Yahoo!? I mean Yahoo!'s YoY growth one year from now might be 30%, while Google might still be around 80%-90%. That is three times Yahoo!'s growth. The gap in finances for R&D is just going to be staggering. Yahoo!'s investment in Alibaba in China might keep Yahoo!'s growth a bit higher though.

Personally I invested in Yahoo! October 1997 and have kept my investment. I invested in Google in April 2005 - when the share was at $193 just before Q1 results. Although I think that Google is a better buy I am keeping my Yahoo! investment, as it is a defensive investment of my Google investment. Yahoo! is after all the 2nd best search engine today, and they are trying hard to get better than Google.

No comments: