Tuesday, October 18, 2005

Google can still go(up)

Since Google's IPO a year ago, the stock price has gone up more than 200% at an astonishing price of $285 per share. Later, Baidu also gone public in the US and again had a great show. Although internet has created many great companies in China such as Sina, Sohu, Netease and Shanda who have performed well in stock market, many Chinese who are true believers in brick and mortar businesses traditionally still cannot believe how search engines such as Google and Baidu can move such tidal waves.

Thinking carefully about Chinese's concerns, mostly likely due to lack of understanding how Google can make any money. In fact, I was thinking about the same thing when I noticed something happened to Google in the America.

Recently, many firms sued Google in federal court in the US. They accused Google for having charged too high prices for advertisement on Keywords that is unbearable for businesses. They hope the court can intervene in the situation.

Just heard the news, I am also confused. Why don't they just stop using Google, or they can send their advertise to places with lower prices? However, I finally came to understanding that due to the dramatic change of people's life by the internet, especially in the US. Online consumption is already a huge trend which could replace direct store purchases. Thus, businesses have no other choice but come to buy keywords from search engines like Google. Since the limited number of related keywords, the prices of keywords are just keep going up that forced some firms to get help from the court. The reason that Chinese do not understand that is because interent is still a media tool instead of a consumption tool in China. The trend of purchasing keywords is just getting started in China. Many businesses still do not have such plan yet.

I recently talked to many about the prices of Baidu's keywords. The high end is about 5000 yuan(about $615) per year while the lowest is only around several hundred yuan per year. Evan that, the acceptance from businesses is still very low. While many of Google's highly priced keywords can cost hundreds of thousand dollars each year with some even surpass a million. Now, it's easy for us to understand why Google's stock can go up so quick to so high. In contrast, Baidu's price went up initially and has come down now. The reason is probably because investors first liked the business sector, but realized that Chinese businesses are still not adapted to the online consumptions through the search engines.

Now we take a look at Google's price. Though it has fallen from it's peak and still with many doubters out there, many investors still think the price has not reflected the true value yet. They think that Wallstreet still has not grasped well on Google's business model and it's hidden potential. First they pointed out the rapid growing overseas market. Googe owns even higher market share in search than that of the US. But the advertisement revenue has not matched up with the search services Google provided.

It's not saying that there is no risk for purchasing Google's stock here. Not many people expect Google to triple again in 12 months either. Many investors are taking a longer term view. They expect Google to move up moderately. They have high expectation for Google's US search business and may not have thought well on the competitions from Microsoft and others, and the possible resistance of online advertisements from consumers.

However, Google's many loyal followers still believe that, after falling from the peak of $317.78 per share, Google's price is severely undervalued. Some of these have billions at hand to dispense that could move Google's price up. Closed on Nasdaq at $285.10 has shranked the company's value down to $79.77 billion dollars.

Reema Shah from J.&W.Seligman & Co. in New York thinks Google's reasonable value should be around 320 to 350. They manage $20 billion assets and own 147,000 shares of Google at the end of June.

RobertStraus from IconAdvisersInc.thinks,Google worths about $337. Icon manages $4.5 billion assets and owns 28,200 shares of Google.

Jason Schrotberger from TurnerInvestmentPartnersInc.thinks Google's price is way too low. They manage $16 billion assets and own more than 500,000 shares of Google. Schrotberger thinks Google is more attractive than Yahoo and eBay.

According to ThomsonFinancial, many analysts expect Google's revenue and income to grow 100% over last year. Mnay US companies are moving marketing spending to online keywords links. Almost 99% of Google's revenue are coming from these advertisements. Google announced in April that, to attract some heavy ad spenders, they will provide many new ad choices. According to Majestic Research Corp., Google has increased clickthroughs on related ads from its search engine users. Google credited that on improved relativity of it's search results.

However, Google' core business of search and keywords link in the US may not reach the high expectations of some investors. The company derives 60% of it's revenue from the core business and keeps them all. If the search advertising has to grow form $4 billion to $12 billion this year, either the keywords customers have to pay more on clickthroughs or the search service customers have to click faster, or both.

At the same time, competition may increase the cost of clickthroughs. Microsoft's MSN is testing it's own ads network and hopes to challenge Google. Google's spokesman refused to comment on this report, only said that "we are focusing on our own products and services, not stock prices".

Google provides services in more than one hundred languages. It also claims major usages are from outside the US. According to Nielsen/NetRatings,in May of all the searchs, 73% in Germany, 62% in France, 55% in Britain are using Google. In contrast, only 48% searchs used Goolge in the US in June. Even Google's market shares are higher overseas, 61% of revenue still came from the US in the second quarter. In China, Google has announced that three partners will help Google to sell ads in China.

However, Google can easily make profits on many of it's popular services. Such as news and map services which Google has not attached advertisements yet. Nielsen/NetRatings indicated that,Google maps and Google Earth services has already attracted 13.3 million users. Google can supply ad links to customers of their map services.

Besides that, Google still has room to highlight more of it's ads on its web pages. It usually means increased clickthroughs and increased revenue for the company. Based on that thinking, Google has increased the ads display on some search result page to three links. Previously only two links were displayed.

Reema Shah from Seligman said:"They still have room to grow".

What I want to say here, using Google as example, Baidu's upside is still very big.

Oct. 19, 2005 Haifeng Yang from Communication World

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