Once again Google surprised the street with much higher than expected earnings. The stock price has jumped $20 today to more than $210 per share and the market cap is almost $58 billion.
I will not be surprised to see consistent positive earnings surprises coming from Google for many years.
I believe that Google is on track to being the most valuable company on the planet. I blogged last year my prediction that within 10-15 years Google will surpass Microsoft in market cap. Here are 7 reasons why it won’t even take 10 years for this to happen:
- Google Philosophy. Google has the right philosophy for our time–they want to change the world by helping everyone in the world have access to the information they need at any time. By giving us all access to extremely valuable data and tools, they are amassing the largest customer base in the world. After providing a service and attracting an audience, they figure out smart ways to monetize it. But that is not their first priority–changing the world is.
- Efficiency of Advertising Model. Once they have eyeballs, the Google self-service model allows hundreds of thousands of businesses to manage their own accounts. New advertisers can set up an account and have traffic coming to a site in just a few minutes. Overture’s staff of humans often takes days to approve a new campaign. Google pays almost nothing to get new customers and almost nothing to generate this revenue–the customers themselves do all the work. The profit margins here are breathtaking.
- Good Partner. Google is unbelievably generous with partners–content sites who accept Google ads in exchange for a percentage of the revenue. Because Google is not evil, and they want all sites to accept their ads, they share most of the revenue with their content partners.
- Employee Pet Projects. Long term, this is the #1 reason why Google will become the most valuable company in the world. I have read that every employee at Google is allowed (or maybe even required) to spend 20% of their time each week working on a pet project. Most companies operate from the top-down. Managers tell employees what to do. Executives make all the resource allocation decisions. But Google has embraced a philosophy which I think can revolutionize the business world–if other companies are smart enough to adopt it. While the most talented, creative, and entrepreneurial people leave companies like Microsoft in frustration in order to start their own enterprises, Google has created an environment where the most talented, creative, and entrepreneurial employees can play in their own sandbox, attract attention and support from top management, and have their pet projected funded within the company. I understand that Larry and Sergei keep a list of the top 100 pet projects in the company. Many of the existing services which Google offers (including Orkut and Google News) were developed by employees. I expect to see hundreds more innovating and exciting free services coming from Google in the coming years. I see more innovation here than from almost all the other top internet companies combined.
- Speed of Decision Making at the Top. Once a pet project or an outside company catches the imagination of Google’s founders, its maybe only a matter of days before they make a decision to invest in something or make an acquisition. Consider Google’s acquisition of Blogger and Picasa. I don’t think a dozen MBAs took weeks or months to build extensive financial models to justify the decision to get into blogging or free photo sharing. Google’s founders’ instincts are so good and they have the ability to make decisions so quickly–that the rest of the world–slow and bureaucratized as most of it is–better watch out as Google makes big moves and does business at the speed of thought.
- Cash Flow Funds Pet Projects and Acquisitions. Google’s cash flow is so amazing that anything the founders want to do in terms of funding employee pet projects or making acquisition, they will be able to do. While Microsoft is distributing tens of billions of dollars to its shareholders through dividends (signalling the end of their ability to generate high returns from investing the cash internally), Google will be investing more and more in its world changing strategies–like scanning millions of books from the major research libraries in the world and offering free voice over IP (free telecommunications) to people around the world. No doubt they will become a leader in instant messaging; they will launch a browser to steal market share away from Internet Explorer; they will be prominent in blogging, online photo sharing, and in online communities. Eventually they may even offer an operating system or network computer with application functionality that will compete head on with Microsoft Windows and Office.
- Open Source and Declining Hardware Costs. All the services Google rolls out are being launched on cheap hardware using open source software. The costs of providing services to the world are declining at an astonishing rate. And Google is there at the right time, investing like crazy. I heard a Berkeley professor in 1999 talk about how CPU, storage and bandwidth costs were approaching zero over time. I don’t think most companies understand what this means. Google is on track to having a million or more cheap computers configured into one great network computer system that will store our personal data, host the knowledge of the world, and provide us with tools for communicating with each other. And the cost of deploying such a world-wide network is decreasing all the time. Which means profit margins at Google will be breath-taking for years to come and the street will continue to be surprised.
In the spirit of full disclosure, I’ve sold my Google stock and invested the profits in Infobase Ventures’ own startup companies. Even if Google increases in value over the next few years and passes Microsoft in market, the return on equity for a good startup company should be much higher than the 5-6 fold returns that Google might provide, the way I see things.
The main risk I see in investing in our own startup companies is that the thousands of smart Google employees might beat us to the punch in executing on most of our good ideas. They seem to be everywhere these days; and I see their pace of innovation only accelerating.
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