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10/26/2004

Truth Will Out: Google's Now Worth More Than Yahoo

This spring I wrote a piece that theorized that Google should be worth more than Yahoo! based on largely on Google's superior operating margins and growth rates.

Unfortunately for Google, they seriously botched their IPO roadshow and a result they had to price their deal at the substantial discount to Yahoo despite clearly superior financials. With the dust setttled from the botched IPO though, investors got their first clear look at Google's financials when they reported 3rd quarter earnings last week and investors clearly liked what they saw as Google now has a market cap in excess of Yahoo.

Why is Google worth more than Yahoo, despite generating 10% less in revenues? Two simple reasons: Growth and margins. On the growth front, Google's Q3 revenues grew 15% sequentially compared to Yahoo's 9% growth. On the margin front, Google's operating margins (less the one-time legal settlement with none other than Yahoo) were 26% in the quarter compared to Yahoo's 19% operating magins. As the old maxim goes "Wall Street Pays For Growth" and Google is clearly growing faster at higher margins than Yahoo.

The big question now is whether or not Google can sustain its premium valuation to Yahoo. Detractors might point out that Google is more vulnerable than Yahoo because Google's revenues are highly concentrated in search advertising, however the other side of the coin is that Google has plenty of opportunity to expand outside of search and into many of the paid subscription services that Yahoo and other internet portals now offer.

With its recently launched G-Mail service and rumors of an IM client and other portal staples forthcoming, I suspect that Google has a lot of incremental growth opportunities ahead of it that will help it sustain its growth. Indeed, at current growth rates Google will surpass Yahoo in terms of quarterly revenues by Q1 05 and they will do this despite the fact that they remain largely a one-trick pony. That's quite a pony!

P.S. Just for the record, if you did a paired-trade with GOOG Long and YHOO short on the day after Google's IPO, you would be up about 28% so far. Looks like that trade might have some life left in it yet.


October 26, 2004 in Wall Street | Permalink

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The thoughts and opinions on this blog are mine and mine alone and not affiliated in any way with Inductive Capital LP, San Andreas Capital LLC, or any other company I am involved with. Nothing written in this blog should be considered investment, tax, legal,financial or any other kind of advice. These writings, misinformed as they may be, are just my personal opinions.