Now that the once-secretive Google has taken the wraps off its financial
data, how does it stack up against its rivals?
The Web search king is growing at a furious rate, and early projections of
some financial analysts pin its profitability on par with that of its biggest
competitors, most notably Yahoo.
In a securities filing last Thursday announcing plans for its US$2.7 billion initial public offering,
Google reported revenue of US$961 million in 2003--up 176 percent compared with
the previous year--and US$105 million in net income. Profit margins, excluding
charges from interest, taxes, amortization and stock options, reached 64
percent, double Yahoo's for the same period, according to American
Technology Research. However, Yahoo's 2003 margin did not include a full
year of revenue from its Overture Services subsidiary.
The quarter ending March 31 showed Google with 59 percent margins, outpacing
Yahoo's 48 percent--all this from a company that lost US$6 million on US$220,000 in
revenue in 1999.
"These margins are extremely high for such an early-stage company," said Mark
Mahaney, equity analyst at American Technology Research.
Using Yahoo's richly valued shares as a starting point, Google might be worth
a breathtaking US$51 billion. That's assuming investors would be willing to pay as
much as 60 times Google's projected earnings for 2005 to snap up shares in its
IPO. More conservative comparisons with e-commerce giant eBay would set Google's
market value at around US$38 billion, or as much as US$98 a share. That's richer
than General Motors--not bad for a company that started up six years ago in a
Such back-of-the-envelope calculations are premature, of course. Google did
not set the number of shares it plans to offer or the price in Thursday's
filing. Those details will be determined later, following an unusual auction in
which individual investors will get a chance to
bid on shares.
Nearly all of Google's money--95 percent--comes
from advertising, which is witnessing a revival after suffering for years after
the dot-com bust. Central to the advertising resurgence is paid search, a
business dominated by Google and a competitor, Overture. The companies sell
keywords to advertisers and then charge them a fee every time a user clicks on
Google also has deals with other companies, such as America Online, to host
keyword search results, offering them a revenue cut for every link clicked.
Last quarter, Google gained US$370 million in advertising alone. Yahoo, on the
other hand, made US$635 million (including a one-time gain) on its mix of display
advertising and paid search from Overture. AOL raked in US$214 million on
advertising last quarter, US$74 million of which came from Google.
Microsoft did not break out its
advertising revenue from its MSN division, but said paid search helped grow advertising by 43 percent from
the same period last year. Microsoft uses Overture as its paid search partner
but has begun to target Google's algorithmic search
While Google's success has prompted its competitors to follow suit, its trail
of high-margin profits and surging revenue may not continue at its current pace,
the company and analysts warned.
"Our net revenue growth rate has declined, and we expect that it will
continue to decline as a result of anticipated changes to our advertising
program revenue mix, increasing competition and the inevitable decline in growth
rates as our net revenues increase to higher levels," the company stated in its
public filing to the Securities and Exchange Commission.
Google's reliance on paid search means its fortunes will fluctuate with the
industry's highs and lows. To draw a comparison, Yahoo watched its full-year
revenue plummet from US$1.1 billion in 2000 to US$717.4 million in 2001 because of
the sudden collapse in online advertising dollars. This drop sparked the exit of its former CEO, Tim Koogle, a
complete revamping of its business, and the
gutting of its freewheeling culture.
Although 83 percent of its revenue comes from advertising, Yahoo still counts
11 percent, or US$88 million, from subscription revenue. Google does not charge
subscriptions for any of its services.
In short, things at Google have been great. But the real test has only begun.
"You've got with Yahoo an execution record," said American Technology
Research's Mahaney. "The numbers are great for Google, but you've got an
unproven team. Let's see if they can deliver as well as Yahoo has as a public