Internet stock investors: Bambi on Google

If I were an active investor in internet stocks, I would read everything that Bambi Francisco has to say, especially about the large internet companies. She has amazing prescience. I\’ve been reading her for columns for years. Today she has an excellent post at AlwaysOn.

She has so many connections and so often has the inside story; but it\’s her analysis that I like the most. Something she can do because she has been covering the industry for so long. She\’s the Mary Meeker of internet journalism. If Mary blogged, I\’d read her religiously too. (Mary was the #1 rated investment banking analyst of internet stocks for several years running. She wrote a report two weeks ago about the future of online advertising and how Google will benefit from the purchase of YouTube.) On Oct. 13th, the Wall Street Journal said Meeker values Google at $500 per share.

So back to Bambi. In her post today, Bambi explains how revenue follows eyeballs–even now, even years after the bubble burst.

Audiences and ad dollars always meet. I recall years ago, when search was considered a commodity.

Companies like Inktomi moved into the caching business, while others — Yahoo (YHOO), Lycos, Excite, AltaVista, etc. –quickly morphed into portals or were buried in other entities. The ad dollars would flow abundantly to portals, and transaction fees to online retailers, so most believed. Back in 2000, nearly $3.8 billion went into display ads vs. $109 million in paid search in the U.S., according to eMarketer.

Last week Google\’s stock went on a tear. It hit a 52-week high this week. The market cap today is $145 billion. Compare that with Yahoo\’s $33 billion and eBay\’s $44 billion.

Bambi told 8,000 investors last Wednesday that she had turned bullish on Google only after it bought YouTube, because now it would be a leader in the social networking and video space, which has huge traffic share online but a very small percentage of advertising revenue so far. Like search back in 2000.

Social networks are estimated to attract $280 million in ad dollars this year, according to eMarketer. Online video-sharing sites are estimated to attract about $385 million. EMarketer estimates that $15.9 billion will be spent in online advertisements in the U.S. this year. That means social networks and video-sharing sites only attract about 1.8% to 2.5% of total online ad spending.

Investors who paid attention to Mary Meeker\’s report two weeks ago or Bambi Francisco\’s comments last Wednesday might have gotten into Google before the recent run.

But more importantly, since I\’m a firm believer in the Warren Buffett, Charlie Munger approach to investing (make only a few bets in your entire life after reading and studying all you can and getting to know the company as if you were its owner, and then stick with those bets over a long period of time), I would keep an eye on Google for the next 5-10 years. I believe it will be worth more than Microsoft within a few more years.

In May 2004 I predicted Google would be worth more than Microsoft within 10-15 years.

In February 2005 I updated my forecast and listed 7 reasons why it wouldn\’t even take 10 years.

Today I would guess that it will take less than 5 years and perhaps even only 2-3 years before Google is worth more than Microsoft. Acquisitions may play a role; but more importantly, each project that Google has launched (and has often been criticized for because they don\’t become #1 overnight with them) is maturing. The pace of innovation at Google still exceeds all the other internet companies combined.

For the last decade, PC owners have found hardware prices plummeting but the cost of Windows and Office staying rather steady. It isn\’t uncommon to pay as much or more for software than for hardware when you purchase a new PC.

But with Google\’s recent moves in the spreadsheet and word processing space (when are they going to offer a free Powerpoint killer?), it won\’t be long before we can buy a $300-500 PC without any Microsoft software on it and be as productive or more productive than ever before.

I\’m not necessarily down on Microsoft. It will reinvent itself. Think about it. IBM is still worth $137 billion. It\’s just a totally different business than it was 20 years ago. Microsoft will find its place in the post-Windows world, but it just won\’t be making all the rules like it has for the last 10-20 years.

How many of you can live without Microsoft products today? And how many can see the time coming soon when Google will provide the OS as well as the free software applications that you and your team need to succeed? (And it will all be monetized through their most-efficient advertising engine.)

What do you think? And does it matter or not?

Since I write primarily to entrepreneurs, I\’m especially eager to hear what Google\’s strategy and success means to you as you make investment and business plan decisions.

5 thoughts on “Internet stock investors: Bambi on Google

  1. Paul: I agree. Google, and importantly – others, are developing products that will release MS’s hold on the Office suite. As an entrepreneur, I use Google products: eMail for domain, calendar, and others. However, I find that free office products such as: ThinkFree and OpenOffice to be superior to any Google (and MS) office apps. Did you know that OpenOffice has a Powerpoint-style application (IMPRESS) which you can save in Flash, PDF, PPT, etc? It’s very impressive. PPT to flash conversion products run $100+. Where as IMPRESS is free.

    The future for me is not always pointed in Google’s direction – but certainly is 100% web-based. Look at this comment. Your blog allows us to collaborate on a subject. It’s not different than if we were sending emails, fax, telephone, etc. back and forth. Everything is opening up and for private, invite only collaboration – nothing is better than web-based office tools. It provides access and eliminates steps of ‘save/attach/send/open/save/etc.’. Instead, ‘save and update my project team’ or ‘or auto-save and send document link to: _______’ is how I want to collaborate on documents. It’s here and it’s very exciting.

    Yesterday I spoke with a friend that couldn’t update his resume ‘because I don’t have Word on this PC’. It’s great that we are no longer limited to having to purchase expensive software. We just need the word to get out. Educating consumers of their options is a chore and it’s nice to see Google leading the way.

  2. Great post…

    I just wanted to throw in a quick shot on the values of Google vs. Microsoft in five years.

    Being a professional geek with my techie eyes (hopefully) open, I wish to make a prediction of my own:

    Google will beat Microsoft in sheer net worth in much less than the predicted five years, due in large part to Google’s sheer phenom status.

    But…as large a part of the equation will be the fact that (/ toggle oracular mode: on) Windows Vista will be Microsoft’s greatest disappointment since Windows Millennium Edition.

    Few doubt that enterprise transition to Vista will be slow. I believe that it will be glacial if not altogether halted within 18 months after the enterprise releases, and that consumer reception will be very, very chilly.

    Microsoft is very eager to get cozy with a lot of people right now who are no friend to consumers, notably the MPAA. The production versions of Vista will have DRM capabilities that won’t allow certain kinds of media to play unless a special, DRM-friendly monitor is purchased and used with the system. Vista doesn’t give a damn about your shiny, pretty 21″ wide screen LCD. Watching your movies will require a new one.

    Vista will also only allow one end-user re-install of Windows after the original OEM install. After the single permitted re-install, the Vista license swallows a cyanide tablet and you’ll need a new license if you want another install.

    These, and many other sweeping changes, are reflected both in Vista’s EULA and technologically within the OS itself.

    I won’t bother to offer a wide-eyed, breathless warning to stay far, far away, but I think that it’s only a matter of time before consumers get wise to the fact that Vista isn’t much more than a somewhat prettier, much more processor and RAM hungry, and locked down version of Windows XP.

    I think that the resulting adverse customer sentiment will hurt MS’s bottom line in a substantial way. And this won’t hurt Google on its march to the top of the hill. Google doesn’t care what your processor architecture is, let alone which version of Windows you run. (/ Toggle oracular mode: off)

    Of course, if it gets bad enough, MS will either open Vista up just enough that their customers aren’t quite so angry, or rush out yet another Windows release, touting an even sexier GUI and more spaghetti code than ever. Ok, not that last part.

    Huh. So that wasn’t so quick. Sorry.

  3. First off, Bambi does write very nice things – “In many ways, HireVue can be more successful in this marketplace than Google since it’s far more focused on the employment service and this one business. Google is far too distracted to win in this area, in my view.” – 4th paragraph from the bottom – some of the best press we have ever got.

    The key for google will be to pull it all together. They are trying to take over the world, plain and simple.

    The new web optimization service, the custom search engine, their changes in the affilitate marketing algorithm which eliminates middle men is to take control of every transaction made on the internet, through adwords. Anything.

    Everything is super exciting with them. To start generating additional revenue I have a feeling they will start attacking other webservices with full force i.e. presentation companies like WebEx and others. They might as well maximize their fiber network and 500,000+ servers.

    We use everything from email, to search engine, to adwords to their new web optimization. It will be exciting to see where they go next.

  4. I don’t use Microsoft products on my computer at all. I have a Mac. I use Neo Office, and it works just fine for what I need to do.

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