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Tuesday, 27 April 2004

Google's IPO

Not that many people were expecting Google to be valued on a sane or rational basis. Here's a good piece, via Brad, on valuing Google:

According to this report, the widely-predicted Google IPO is likely to value the equity in Google at more than $20 billion - others suggest $25 billion. I immediately wondered whether Google was really worth $25 billion. I started on a standard financial analysis. Although, as a private company, Google doesn’t have to publish annual reports, it’s been estimated that Google has annual revenues of $500 million and profits of $125 million so that the return on equity is about 0.5 per cent. We can expect that to grow reasonably fast in the next few years, but the scope for expansion in Google’s core business is far from limitless. Most people in the developed world are already online and most of the heavy users already use Google (Eszter might have more to say on this). Moreover, there’s no strong reason to suppose that Google will be around in, say, 20 years time. I find it hard to draw a plausible earnings path that would yield a present value of $25 billion at any reasonable discount rate. [more]

More telling is Brad's comment. I'm not one to jump on the Google bandwagon (that said, now that I've got my Google Mail account, I'm wondering what, exactly, I'm supposed to do with it), but he does pose a good question:

Google needs to grow to approximately ten times its current profitability and then maintain its market share and margins indefinitely in order to justify the $20 billion valuation. And that's hard to see: high sustained profits are the result of effectively-maintained barriers to competitors--think Microsoft, think Intel. What is going to be Google's counterpart permanent edge?

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