The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

24 January 2006


"Google is undoubtedly a great company, and online advertising is still in its pretty early days, but be very careful. Google's future will be much more competitive than their past, which is going to really start testing management. Over the coming months, It would not surprise me in the slightest to see MSFT perform a 'scorched earth' strategy to ad sharing margins with publishers (share 100 percent of revenue), while Yahoo has already decided to share much more with publishers. Assuming what I am reading about the DOJ request is correct, challenging them is just plain idiotic. The DOJ seems to be asking for generic information (not personalized) and as I've said before, I really believe that this type of information should be part of the public domain to begin with. If Google is really worried about a slippery slope, challenge the Govt. when that point comes and they request personalized information. Today, this is a huge distraction just as every company in the Valley has their knives out and is heading towards GOOG. I think this can ultimately become a strategic nightmare for Google if they force a fight and have to capitulate in the end. For two reasons: 1) It will shine a spotlight on just how much info Google has about its users (and whether we should trust them with all that information) and 2) It will expose the populist tone that Google is now using as hot air. Long term, despite the tone of this message, I remain bullish on Google- as much for the growth in online ads as for the company itself. While the next 3-6 months should be see remarkable growth, I think that the next 12-18 months are going to be quite difficult for Google. We shall see." -- AP
Hi, AP,

Thank you for your comments. I apologize for replying with a new post (rather than in the comments field of the other post), but, no surprise, I found my reply quickly exceeding the 3,000 character limit.

First, allow me to call attention to these two articles (article 1 and article 2) that are germane to this topic. Of course, I must quibble with several of your tenets:
1) It is indubitable that "Google's future will be much more competitive than their past"; this is, after all a principle of capitalism -- to bid down excess returns. But as article #2 attests, Yahoo gives up the chase to supplant Google for search dominance. Can other companies be far behind? Google rapidly becomes akin to a cosmological black hole; it will prove beneficial for other companies to partner rather than compete.
2) I agree that the future environment will "really start testing management"; I hope Eric Schmidt and other executives measure up to the coming challenges.
3) I disagree that Microsoft has a field position from which the company could "perform a 'scorched earth' strategy to ad sharing margins with publishers"; Google is the dominant player in this area, and fast becoming its pre-dominant player. In addition, Google has the financial wherewithal to withstand forays (such as you limn) from Microsoft. (But does it have the business savvy?)
4) The stance Google takes with this fishing expedition from the DoJ could be misguided, as you suggest. Perhaps the company should fight the battles it knows it can win. And yet, this moment is a character-defining battle; just where is the line in the sand, and who draws it? Already, Google reaps both positive PR and increased usage and trust. (NB: article 1 link.)
5) I do not know, but I suspect, that Google will report another startlingly positive earnings report come Tuesday, 31 January. The report, by itself, might prove insufficient to snap the shares out of this price correction, but it could highlight Google's increasing nature as a vortex for online advertising spending. As you say, we shall (soon) see.

I predicate my continuing bullish stance on precedent. Those familiar with my prognostications might recall my original posts here (and my comments elsewhere that precede the creation of this blog) that Google/GOOG is a generational, singular opportunity, and that only one other company shares many similar hallmarks: Microsoft/MSFT. The simple fact remains: there is no historical precedent for a company that has achieved and accomplished so much, so quickly. Starting from a standing start to...
• multi-billions of $$ of revenues,
• explosive growth of earnings,
• dominant market share,
• increasing public trust,
• increasing usage of its core product,
• all after building a better mousetrap (taking Overture's creation of online advertising, and improving it to the degree that advertisers begin a rush to the online ad world).

Microsoft/MSFT had to endure many, many challenges in its existence, including the ~20 years it has been a publicly-traded company; Google/GOOG will have need to endure the same. From a Microsoft-centric perspective, Google arguably represents the company's greatest challenge to date. However, in the race to a decentralized, mobile computing environment, an environment in which one is no longer tethered to a desktop, Google/GOOG probably emerges triumphant.

And so I wonder: How high is high (precisely)? I am on record that I expect Google/GOOG to become the first company/stock wth a 1 trillion dollar market cap. With its current float, that computes as ~$3,333. Far-fetched? Perhaps, but I use that figure as a directional beacon, and not fixed. You see, I perceive Google/GOOG to be the apotheosis of so many disparate trends (social, cultural, financial, etc) that nothing would surprise me -- and certainly not a dramatically higher share price (granted sufficient time).

Of course, there is a lot of time between now and then, and a world of hurt that could afflict the company (business environment, socio-political, etc). Doubts will always arise, but should not stop the determined investor. The manner in which most investors now perceive Microsoft/MSFT as an unstoppable juggernaut (with the certainty that hindsight brings with it) is the same manner I view Google/GOOG, albeit with the uncertainty that comes with staring into the unknown future. I have, and welcome, history as my guiding light. Caught in the swirling, seemingly non-coalescing winds of change, I detect a pattern; a pattern that has worked so often in the past I see no reason it should not work again. Especially now.

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