The Google Numbers

Are pretty amazing. If you are wondering why the stock is up $29 in after-hours trading, consider the following. Google (GOOG) grew revenue 14% sequentially from Q2 to Q3. During the same period, Yahoo (YHOO) grew sales 6%. So, right now GOOG is growing more than twice as fast as YHOO. And yet when you look at today’s closing prices, GOOG is 41x 2006 EPS with YHOO trading at 47x. Another point to think about is Google grew 14% sequentially in the 3rd quarter (which equates to 69% annualized), which is seasonally the weakest quarter of the year.

Talks For AOL Partnership Heat Up

Reports indicate that talks between Time Warner (TWX) and several technology industry giants regarding an online partnership with America Online have heated up in recent days. Some are speculating that a deal could value the entire AOL division at $20 billion. So what does TWX stock do yesterday on this news? It drops 2%, which can be attributed in part to the news that Yahoo and Microsoft are linking accessibility to their instant message programs.

Time Warner itself is valued at slightly more than $80 billion, with the AOL subsidiary widely considered dead as far as online innovation is concerned. And yet, reports of a deal are indicating that AOL might be worth 25% of Time Warner’s total valuation. If true, TWX’s current share price hardly makes sense to me. At $17, TWX repreesnts a wonderful value in a market that has been, to borrow a Jim Cramer term, a “house of pain.” If investors are looking for good deals with limited downside, Time Warner shares looks like a solid bet.

How Long Until Wireless Net Access is Free?

Google (GOOG) has gotten a lot of press lately after it submitted a bid to help provide free wireless “Wi-Fi” Internet access to the city of San Francisco. Rather than debate what Google has in mind as far as its future business model, I’d prefer to think about who gets hurt with such a technological development, so perhaps investors can make some money on the short side of the market.

Personally, I think free wireless access to the Net is inevitable. Maybe it’s courtesy of Google, maybe not, but that’s not the point. Ten or fifteen years ago, computer users would have laughed at the idea of getting high-speed access to the Internet over cable lines or from satellites, as opposed to their traditional phone lines. In the new millennium though, dial-up is dying, broadband has become mainstream, and wireless is getting there.

Online access is a commodity service, so it makes sense that prices are set to come down over time. However, with companies like Google sitting on billions of dollars in cash, they do have the ability to drive that price all the way down to zero. Interestingly, there are still two publicly traded stocks that are pure plays on Internet access; Earthlink (ELNK) and United Online (UNTD).

Much like Blockbuster Video (BBI) and Movie Gallery (MOVI), the core business of these online service providers is faced with falling prices and constant industry change. Given that the potential is there that paying for Net access could become a thing of the past, just like movie rental storefronts, a combined market value north of $2 billion for these ISP companies looks attractive to potential short sellers.

The Future of AOL

Rumors are swirling about what Time Warner (TWX) will do with AOL. CEO Dick Parsons has stood firm that they want to keep AOL as part of the company and transition it to an advertising model from a subscription model, given that AOL’s more than 20 million members have been leaving, and will continue to do so for obvious reasons.

Today, with the Google (GOOG) secondary offering complete (and it went well by the way, with the stock trading above the $295 offering price) the market is trying to figure out which of the rumors could come to fruition. Will Google buy AOL? Will Microsoft (MSFT) buy at least a stake in it and combine AOL with MSN? Reports indicate that at the very least, all of these major online players have had discussions.

While I don’t really have any insights into what will happen, I can tell you that the media and Wall Street will almost certainly badmouth any company that partners with AOL. For years investors have basically ignored AOL as a long-term viable part of Time Warner. Analysts often say that Wall Street is valuing it at zero when trying to explain TWX’s stalled out stock price.

However, there are things to consider here. Not only would any type of deal benefit Time Warner, assuming investors are assigning no value to AOL right now, it might not be a bad deal for Google, Microsoft, or anyone else. For the first six months of 2005, AOL had revenue of $4.23 billion. Some may be surprised how profitable this business is for TWX. Adjusted operating income (before amortization and depreciation) was $1.09 billion. Clearly, AOL is worth something and that something is in the billions.

AOL has to change business models. Home users of the Internet no longer need AOL as their gateway. Advertising at AOL has an uphill battle as Google and Yahoo (YHOO) continue to gain market share. With the help of a leading Internet force, AOL could very well become even more valuable, and investors are already underestimating the value of Time Warner’s America Online unit today.

Google Shares Moving Sideways on Low Volume


Newly released Google Desktop Search 2 and its accompanying Sidebar really gives you some idea of where the company is heading. They want to take over your PC and dethrone Microsoft as the desktop monopoly. I haven’t seen software innovations like these before. It’s hard to not get excited about it, and not even just from an investor perspective, but instead simply as a computer user.

As for Google (GOOG) stock, the chart looks very bullish. After a huge move, the shares have been moving sideways on lower volume. Growth investors probably can feel comfortable about owning it down at these levels. The next 6 to 12 months should be very exciting for industry watchers everywhere.

VeriSign Shares Becoming Attractive


Shares of Internet service firm VeriSign (VRSN) have gotten crushed recently after a lackluster Q2 earnings report resulted in a broken chart. After breaking $25 per share, technical sellers have pounced. At $21 VRSN is only about $1 away from the next support level, and trades at 20 times 2005 estimates. The company should grow 15% annually for the next few years and holds $3 per share in cash and no debt. If VRSN can hold the $20 level, it looks like an attractive entry point.

Google Offering Signals Major Moves Ahead

Leave it to Google (GOOG) to get creative a year after its IPO. Today’s announcement of a $4 billion secondary will come with rampant speculation as to how the company will use the money. It’s true that Google has been hiring like crazy and expenses will likely grow faster than sales. Their cash flow can cover those expenses without selling more shares, so the more likely use for the proceeds will be larger scale acquisitions. It will be interesting to see if and who they buy, and how Wall Street reacts to the fit of such deals. The stock is down today on the news, which is expected when any company offers stock, and the P/E on 2006 estimates is about 38 times.

And I Thought the MSTR Call Was Entertaining

Via the link below you will find archives of two conference calls held this month by Overstock.com (OSTK) along with a slideshow to go along with each. I suggest listening to the Q2 call first, then the one about the lawsuit, in order to get a full understanding of what’s going on. Entertaining is an understatement. They will also help you understand why 52% of OSTK’s float was sold short as of July 12th, and you can’t borrow any shares as of today.

http://www.shareholder.com/overstock/MediaList.cfm

Contain Excitement Over Cisco/Nokia Rumors

Nokia (NOK) shares are up this morning as rumors are swirling that Cisco Systems (CSCO) might target them as an acquisition target in the wireless space. Before investors get too excited about the possible combination, let’s recall Cisco’s acquisition strategy.

The company does a lot of deals, but very small ones in most cases. The idea that Cisco would be interested in a mega-deal seems farfetched to me, and probably mentioned mostly for headlines. Cisco has a done a few medium size deals (The 1996 purchase of Stratacom for about $4 billion comes to mind), but CEO John Chambers paying $73 billion for Nokia would be surprising, given that Cisco is only worth $124 billion, hardly a small deal to swallow.

Nasdaq 5,000?


Why didn’t I buy shares of Baidu.com (BIDU) when the IPO that priced last night at $27 opened today at $66 per share? Did it really hit $151 this afternoon? Is it 1999 all over again?

Now I know this is the largest search site in China, and only 10% of that country is online today, and people are making a Google (GOOG) comparison, but keep in mind the company is now worth more than $4.3 billion and had first quarter sales of $5.1 million.