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Mobile Phone Initiatives Help Google Become 5th Most Valuable U.S. Company

November 5, 2007 Chad Brand, Peridot Capital Management LLC
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Google's plans for a strong push into the mobile phone market has excited investors enough to not only push the stock over $700 per share, but perhaps even more startling, the Internet search and advertising giant is now the fifth most valuable U.S. company. For a firm founded in 1998, this is an astounding ascent in less than a decade. My initial thought when seeing this list was to simply conclude that it is really ridiculous, and hence time to unload every single Google share I own. If you just look at the numbers and the other names on the list, it is hard to justify Google coming in at number five, no matter how dominant, profitable, and fast growing they are. But then I started thinking about other ways to put this list into context, and began to able to justify their position.

Let me give a brief explanation and then please feel free to give both sides of the argument from how all you see it. I have said before (and maintain) that investors need to compare similar companies when making valuation calls. They are called "comps" for those of you who have worked, or do work in the investment banking industry. If you are taking a firm public, you look at comparable publicly traded competitors to get an idea of how much investors are willing to pay for your client's shares, which aids you in determining an IPO price. It is the same process when you are selling your home. The comps your real estate agent uses to come up with an initial asking price is based on houses in your neighborhood, similar to yours in size and amenities.

This is important because we need to compare Google to other technology companies. In this case, the comps would be the likes of Microsoft, AT&T, and Cisco. Does Google belong on a list with those other leading tech firms? Well, Microsoft owns the operating system and business software space, AT&T leads in telephony, as well as Cisco in networking equipment. All of these areas have become crucial to everyday life and represent huge market opportunities. Is Google really any different? Sure, the Internet has really only been mainstream for ten years or so, but think about how crucial it has become in most people's everyday lives. Compare how much time you spend on the Internet to the time you spend on the phone on any given day, or using Microsoft Office at work. I bet it is comparable for many of you. For me, it trounces those two.

Some mistake Google for “just a search engine” but we do many more things on the Internet than use it to look something up. Email is a core communication tool, moreso than the telephone, for many of us. Just thinking about what I do online now, the list is quite long. I pay my bills, maintain my address book, get weather forecasts, go shopping, manage my fantasy football team, trade my stock portfolio, check movie times, read blogs, get news reports, get driving directions, book airline tickets, archive my photo collections, balance my checkbook, manage a to-do list, etc. I could go on, but you get the point. Before the Internet I did all of those things via the television, the newspaper, the telephone, through the mail, or at my desk. Now I do them all digitally over the Internet, in many cases with the help of Google software.

If the Internet has transformed our daily lives this much in ten years, isn't it safe to assume that it is not going away? If Google is going to be a leader in providing many of these services, and can make money on them through advertising (much like your local newspaper or television station), then I can completely understand why they would be joining the likes of Microsoft, AT&T, and Cisco in terms of market value. Obviously, things can go wrong and new companies can take over an industry. After all, for every AT&T, Cisco, and Microsoft that has continued to lead despite intense competition, there is a Digital Equipment, Silicon Graphics, or Polaroid that has practically vanished because of it. Google's fate is unknown, but people are betting that they maintain their lead, and I do not think that is such a ridiculous belief to have.

In my mind, if the Internet continues to change the way we live and help us accomplish tasks more quickly and efficiently than prior tools such as TV, phone, mail, or print media, and Google continues to be a leading software company focused on enabling all of these things, who is to say they should not have a seat at the head table with everybody else?

Full Disclosure: Long shares of Google at the time of writing

In tech and telecom
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