In the prior article we analyzed Google and Yahoo!. We found that there is more downside risk in owning these stocks inspite of what Cramer says in his MadMoney show.
The cnn article below discusses on how Google's growth rates are slowing to 50-60 this year and to about 40 next year. This is lower than my earlier expectation of 60-70% growth this year and 40-50% next year.
We analyzed in the past segments that search is going to be a three way fight between Microsoft, Yahoo! and Google.
We are going to see declining P/E ratios at both Yahoo! and Google as the search battle intensifies. Microsoft is already loosening the purse strings by offering cash to people to use MSN Search. Expect Yahoo! to do the same as they figure out how to roll out their own adsense program within a year.
I think the Google model is still very viable but the catch is to diversify the revenue stream quickly. With the P/E declines, Google can expect to see its price decline further or remain steady. With 50% growth this year, Google's earnings will be 7.53/share. With 40% growth next year, Google's earnings will be about 10.54/share. If we take a P/E of 35 to account for further deceleration in Google's P/E, we are looking at a price of 370=00 in 2008. This is still up of about 8.8% compared to Friday's price. I can make about the same investing in U.S treasuries at 4.5% with zero risk in two years.
This doesnt account for competitive pressures in the ad market, more expenses because of additional stock compensation or venture into additional markets to increase revenue. It is likely all three will happen simultaneously.
Yahoo! price point is still not attractive to buy the stock. The growth rates for Yahoo! should decline further next year compared to this year. The stock is fully priced at the current levels and it doesnt provide any significant advantages over the treasuries at this time.