May 3rd, 2004

Google is growing rapidly and early projections of certain financial analysts attribute its profitability on par with that of its biggest competitors, most notably Yahoo.

Now that the once-secretive Google has taken the wraps off its financial data, how does it stack up against its rivals?

In a securities filing Thursday announcing plans for its $2.7 billion initial public offering, Google reported revenue of $961 million in 2003--up 176 percent compared with the previous year--and $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 $6 million on $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 $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 $38 billion, or as much as $98 a share. That's richer than General Motors--not bad for a company that started up six years ago in a garage.

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 the link.

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 $370 million in advertising alone. Yahoo, on the other hand, made $635 million (including a one-time gain) on its mix of display advertising and paid search from Overture. AOL raked in $214 million on advertising last quarter, $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 business.

While Google's success has prompted its competitors to follow suit, its trail of high-margin profits and surging revenue may not continue at it 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 $1.1 billion in 2000 to $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 $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 company."

Source: C-Net News

        

Read Serge Thibodeau's daily blogs on search engines at Serge Thibodeau Live. We strongly suggest you bookmark our web site by clicking here.

Get your business or company listed in the Global Business Listing directory and increase your business. It takes less then 24 hours to get a premium listing in the most powerful business search engine there is. Click here to find out all about it.

Rank for $ales strongly recommends the use of WordTracker to effectively identify all your right industry keywords. Accurate identification of the right keywords and key phrases used in your industry is the first basic step in any serious search engine optimization program. Click here to start your keyword and key phrase research.

You can link to the Rank for Sales web site as much as you like. Read our section on how your company can participate in our reciprocal link exchange program and increase your rankings in all the major search engines such as Google, AltaVista, Yahoo and all the others.