A small technology company with a goofy name goes public, and before long it is a market titan with a valuation larger than one of the Big Three auto makers. Haven’t we seen this movie before? Sure we have. The first time around it was Yahoo!, complete with exclamation mark (in case you weren’t excited enough already). This time it could be Google – no exclamation mark, but still plenty of heavy breathing about the billions of dollars it could be worth someday.
Most of the people getting all hot and bothered about a Google IPO are on Wall Street, of course, where brokers haven’t had a nice blockbuster technology offering for years. Mention hot IPO and people either think of brokerage firms “spinning” shares of tech firms to their favoured clients, or they think of infamous flameouts such as theglobe.com – which climbed tenfold on its first day in 1998 and soon after disappeared from the face of the earth.
But things are different now, some say. How? Well, for one thing, Internet companies actually make money. Yahoo, for example, has been turning in quarterly profits for some time now, and even Amazon has had a few. The bottom line at eBay, meanwhile, seems to grow by 60 per cent or 70 per cent every quarter. Let’s not be crass and point out that several of these companies exclude various expenses to produce those profits, including the cost of stock options (which would have caused Yahoo to lose $440-million last year instead of making a profit of $43-million).
Profits per se aren’t what has bankers all a-quiver, however – it’s the immense valuations that are being assigned to stars such as Yahoo and Amazon, as well as up-and-comers such as Netflix and even also-rans such as Ask Jeeves. Yahoo is selling for more than 114 times its estimated profit for this year, while Amazon sells for 92 times and eBay for 75 times. Netflix is trading at 100 times this year’s profit, and AskJeeves is selling for about 52 times.
So is Google just getting greedy for some of that hard-earned bubble IPO money, or is it getting its arm twisted by Wall Street? Probably a bit of both. It would take a superhuman effort to resist the prospect of becoming an instant billionaire, as co-founders Sergey Brin and Larry Page would in an IPO. And meanwhile, brokers are whispering in Google’s ear about how it could use the funds for acquisitions.
But isn’t Google the best in the business? No question. As search “engines” such as AltaVista and Yahoo started to grow long in the tooth in the late 1990s, Google came along with its patented “Page Rank” technology. Instead of using search terms (the old method), Google’s engineers came up with a way of determining which page was more likely to be useful to a particular searcher, based on the number of other pages that pointed to that page.
Although Google is clearly the title holder when it comes to fast and accurate searching, however, competition has been heating up with Yahoo since Yahoo bought Overture for $1.6-billion (U.S.), and there is a gorilla on the horizon: Microsoft. The software giant has been talking about improving the search function on its MSN service by designing its own search engine. More funds equals more ammunition for a fight with the world’s largest software maker.
So a Google IPO means that Wall Street gets its blockbuster issue, the market gets a nice big number to compare its other inflated valuations to, and Google’s founders not only become obscenely wealthy but have lots of money to go up against the Gates empire. Now all that needs to be done is to settle on what Google is worth.
All sorts of numbers have been tossed around over the past few months: anywhere from $15-billion to $25-billion, depending on who’s doing the talking. Yahoo is worth (using the term loosely) $27-billion, while eBay is worth $36-billion and Amazon $22-billion. That puts eBay just behind DaimlerChrysler, Yahoo in the same league as Alcoa, and Amazon near General Motors.
Of course, no one is quite sure how much money Google makes, but industry sources say it is expected to have sales this year of between $700-million and $1-billion, and to make about $200-million in profit. Not a bad business – and industry analysts say they expect sales next year of about $1.5-billion. Assuming Google can keep its returns high (and that these estimates are even close to reality), the company might have a profit of $400-million next year.
If you use next year’s estimated profit and apply Yahoo-style multiples, you get a market value of between $21-billion and $30-billion for Google – since eBay is selling for 54 times next year’s profit, and Yahoo is selling for 78 times. If you use a sales figure you get a potential market value of about $18-billion, since both Yahoo and eBay are selling for about 12 times next year’s estimated sales. Now you can see what has Wall Street so excited.
But will the fact that Google can be sold for those kinds of valuations justify the prices people are paying for eBay and Yahoo, or will it simply call attention to how absurd they are? That remains to be seen.