In this blog, we have looked at Google several times. In one of the previous analysis, we made the following statement about Google.
The competition is definitely going to heat up in the second half of this year and next year. In the prior article we discussed Google and Yahoo and found that a price of $340=00 provided a rough upside comparable to investing in U.S treasuries for the next two years. Given that the sale of 5.3 million shares will dilute the shares by about 2%, the target price in 2008 falls to 372 dollars
Google is currently trading at 383.00 dollars a share above the 2008 target price. While predicting the future is a fools game, the warning signs about Google are everywhere. One thing that was a positive for Google for a while was gain in market share at the expense of its chief rivals Microsoft and Yahoo!. However, this seems to have come to a stand still of late. If the report from market watch is to be believed, Google's market share gains have peaked or are unlikely to increase further.
Google has a market cap of 120 billion, half of that of Microsoft. The cash flow per share in the last quarter for the two companies was ~120 million and 3.5 billion respectively. Interestingly enough, Yahoo! had a better cash flow than Google in the last quarter.
This means something has to give. Either Google has to increase its market share to justify the capex or Google's bets arent paying off in the way it anticipated. A worry about Google's business model is that it will end up paying content providers larger piece of the revenue pie to get the ad dollars. This can put pressure on its margins as Yahoo! and Microsoft start rolling out their own text ads.
The slope seems to be flat or down for Google in the next one year - unless the market watch report is incorrect and Google is able to continue to grow its ad market share.