Pondering GOOG

The quarter that Google (GOOG) just announced was very impressive. This is starting to become a quarterly occurence. I read the numbers, shake my head, and wonder how long they can keep this up.

Last quarter, I saw the numbers and wrote the Oh My post, which included:

We are witnessing a business that is approaching $10bn in annualized revenues growing at 80% year over year. And we are looking at a business with operating margins of almost 50%.

Well it just gets better. This quarter, revenues were up 20% quarter over quarter to almost $2.5bn. Operating profits were close to $1bn and net income was almost $750mm. Here’s the transcript of the earnings call at Seeking Alpha.

So Google is generating about $4bn per year in pre-tax cash flow. If you call that EBITDA, and it’s close enough for a back of the envelope number, you’d say that GOOG trades at about 30x this year’s EBITDA. That’s almost twice the multiple that Yahoo! (YHOO) trades at currently.

I bought some YHOO earlier this week. I am not so sure about GOOG. Because I don’t know how much longer GOOG can put up these kinds of numbers.

I hear that many search keywords are getting bid up to the point where the CPAs they generate are approaching the marketers allowables. Does that mean that keyword prices can’t go up much more?

And I hear that searches are growing at about the same rate as the Internet as a whole meaning search still has nice growth but not 25% quarter over quarter.

And I hear that marketers are frustrated that they can’t effectively buy any more search.

And I hear that new forms of banner ad targeting are giving marketers a way to generate CPAs from banners that are approaching and at times exceeding search CPAs.

So I wonder how much longer this search driven revenue wave will last. And as great as Google is, they are completely and totally dependent on search and contextual advertising revenues. According to the transcript, Google.com was $1.4bn and I assume Adsense was at least $600mm, so that means that at least $2bn of the $2.4bn of revenue comes from their two big juggernauts. If that slows, Google slows.  At least until some of their other iniatives start producing big numbers, if they ever do.

This post is not really about me making a point. It’s about me asking these questions. If you have any answers, please post them in the comments. I am sure I am not the only one who wants to know.