What's Google Really Worth?


By Alex Salkever You don't need a search engine to find opinions about this topic: How much Google would command if it were to go through with a much-anticipated, first-time sale of stock to the public -- which many believe could happen as early as the first quarter of 2004. The fascination with Google's initial public offering is a no-brainer since it could prove the most lucrative and successful IPO since the dot-com crash.

Informed speculation says Google will issue an initial $1 billion worth of shares, which would represent what analysts think is about a year's worth of sales. That's a huge deal considering how unfriendly the IPO climate remains for tech concerns. The more enthusiastic sorts on Wall Street say an IPO may be worth as much as $25 billion, based mainly on a comparison with successful Web giants, such as Yahoo! (YHOO), Amazon (AMZN), and eBay (EBAY). Other experts respond that such an appraisal is wishful thinking.

"As a point of reference, Internet leaders eBay and Yahoo currently command share-price-to-sales ratios of 19 and 22, respectively. If Google is in fact close to the $1 billion in sales mark, then a $15 billion to $20 billion valuation is probably a reasonable estimation," according to an Oct. 24 research note by Renaissance Capital, which manages the IPO Plus Aftermarket Fund (IPOSX). That assessment has been echoed elsewhere on Wall Street.

APPLES AND ORANGES? However, it has one drawback in that eBay and Yahoo may not make the best benchmarks. eBay is a commerce outfit with a completely different business model. And while Yahoo derives much of its revenues from searches, it gets 30% from other functions, such as listings and fees. Additionally, growth rates at both eBay and Yahoo have been quite different from that of Google. Nevertheless, some experts seem to be looking at their price-earnings ratios to come up with a valuation for Google of near $25 billion. Yahoo has a p-e of 82.7, and eBay's is 55.9.

Other companies may be more useful benchmarks in trying to figure out how much Google is worth. One is Overture, Google's head-to-head competition in getting companies to pay for search-engine listings. Overture is expected to bring in $862 million in revenue for 2003. Each has been growing at a comparable rate, according to analysts, with Google perhaps having a slight edge. Yahoo finalized its acquisition of Overture in early October, but premerger market stats on Overture, which was public before the acquisition, shed light on the calculations about what Google might be worth.

Then there's Verity (VRTY), whose software provides information-management products to help companies manipulate and use data in their computer networks. One of Verity's core functions is enterprise search. Google gets anywhere from 10% to 30% of its revenues from providing search to companies or Web sites, so this comparison seems apt.

THE OPTIONS ISSUE. These two outfits together represent a fairly accurate picture of where Google gets its revenue. Prior to the Yahoo-Overture merger, the market figured Overture's forward p-e was 44.4. And Verity's is a relatively conservative 38.8, given that it's a high-growth tech concern. If Google's hypothetical p-e is more in the range of Overture or Verity, then its valuation would be much lower than the numbers now bouncing around Wall Street, experts say.

Analysts also seem to be ignoring two potential challenges that could hinder Google coming in at the high end of these IPO price scenarios. Microsoft (MSFT) has been buying talent in the search sector and is expected to launch its own product in the not-so-distant future. While experts say Google is well run, competition from Microsoft could affect its bottom line.

Another thing to watch for is what the Financial Accounting Standards Board (FASB) does regarding stock options. No one knows for sure, but industry experts say it's more than likely that Google has a significant number of stock options outstanding. In the aftermath of the corporate scandals of the past two years, should FASB decide that companies need to list stock options as a balance-sheet expense, Google might well look like a less profitable -- and less enticing -- investment.

GOLDEN SILENCE. Maybe Google is doing better than anyone realizes in terms of revenues and profits. It hasn't yet made financial disclosures to the Securities & Exchange Commission, a mandatory step before going public. The best estimates now are that Google boasts revenues of around a $1 billion per year and annual net income in the $100 million-plus range. Google declines to comment on those figures.

In the end, pent-up demand for promising new tech offerings could drive Google's valuation into the stratosphere. But more discerning investors might want to take a closer, comparative look before plunking down their cash. Salkever is technology editor for BusinessWeek Online


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