Thursday, February 03, 2005


I did not plan to write about Google again so soon. However, I was sent a negative report published by Sage Capital of Zurich, Switzerland. The following is a copy of my email response.

You may be correct about Google. I bought on the offering and twice since; so, I have a biased opinion. Others made similar arguments about MSFT in the early ‘80s which were proved to be very wrong; but, MSFT is a very rare duck.

My issue is that you pushed too hard to make your point. Yes, 138 is a big number. However, the company made $.95 the fourth quarter. If you annualize the current earnings rate, you get $3.80 and a PE of 55. Still a very large number, but it will only take two earnings doubles from here to get the PE to a reasonable level.

Google keeps catching folks by surprise. The company that until recently charged $500 per month per user for cataloging of TV shows is hurting now that Google does the work for “free”, other than the advertising revenues. Google has zero revenues in this area now so the growth rate is going to be quite large this year. Indeed it will be large in this area for several years.

I am glad you used AT&T as an example. Phone companies will probably feel a lot of pain within a year or so. Before very long, Google will make just a few trillion phone connections over the internet for folks. When users click on their phone address book or link, they will be exposed to an ad but the call will be free to the caller. The fellow who wants to call that chocolate shop will likely notice another shop is offering new customers a free taste or two. If the customer goes for the free taste, Google will get paid.

The size of the advertising pie is going to grow dramatically. With each new “free” service offered by Google, the number of convenient and relevant advertisement spaces grows by leaps and bounds.

How many advertisements will all the companies in the world issue if they only pay if and when an ad leads to a response?

The consumer demand for free services is how big?

Wow! That was a good question. I must ask it again, the demand for free services is how big?

Where do these supply and demand curves cross?

Wir haben Ihre Anfrage erhalten und werden Ihnen entsprechend antworten.
(Auto out of office reply. They will get back to me.)


Jack's Old Merrill Pal said...

I read the article and based on fundamentals, he makes a very compelling case. I own a small amount of Goog and will continue to hold (on). I agree the internet is in its infancy. Just the other day I went to the mall to buy shoes. They did not have my size so I go online and buy without alot of the hassle. Therefore the internet offers real advantages to those and it will only improve.

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