NOVEMBER 30, 2008:  GOOGLE Breaks A Nasdaq Record for Largest Market Cap Loss In 1 Month
The following are five reasons I think Google might be overvalued and why I think that when the stock price falls that it will not be a gradual decline, but rather a rapid loss of market capital.   I think the headline will look something like the one above.


Quality Parity
I use search engines a ton, so it is important to me that I use the best one.  I have been doing some informal testing between Google, Yahoo, and Microsoft to see if I could figure out whose algorithm produced the best results.  For example, here is a chart showing where SmallBusiness 2.0 ranks on each of the major search engines when I query specific terms.  As you can see, Microsoft and Google's results are not vastly different and I think both their algorithms are starting to "understand" this blog relatively well while I do not think Yahoo's algorithm "gets" what we are up to at all.

I think it is widely assumed that Google's algorithm is vastly superior to anything else on the market, but when I look at these search results, I am starting to think that Microsoft is catching up.  I can imagine a point in time where parity might be achieved and where several impartial and credible observers might comment to that effect publicly.



Switching Costs
Google has incredibly low switching costs.  As I sit here, I cannot come up with a single product with a lower switching cost than Google search (as a user).  Can you?  One of the few things Yahoo got right early was that it created some other applications with relatively high switching costs, like the My Yahoo portal, Yahoo mail and an address book.  I suspect much of Yahoo's search traffic (= ad revenue) is a result of users of other applications searching because they were already there.  As you can see from this chart I borrowed from Don Dodge's blog , over 88% of Google's traffic is generated from their vanilla search and image search.



If you were a search-only user of Google and you read a few reports saying that other search engines were better, why wouldn't you switch to another vendor's engine?  Basically, the question is, what is stopping someone from doing to Google what Google did to the original search leaders?

Reverse Tipping Point
The thing that is so elegant about Google's business model today is that they have a positive reinforcing system dynamics loop powering their growth.  The best search engine = More Users --> More Advertiser --> More users --> More advertisers --> etc.

If impartial, smart people were saying that Google's results were no longer the best and there were very low switching costs, then the "more users" part of this reinforcing loop would break and the advertising revenue would start to go down.  This feels to me like the type of thing that happens quickly, not gradually.

Yellow Pages or Search Engine?
Some might argue that Google's "brand" creates high switching costs.  Over time, I have noticed that Google's results page has become more and more crowded with advertisements.  For example, I just did a search on "small business marketing" and I got 7 paid results (yellow page ads) and 3 organic results above the fold.  The same search on Yahoo produced 8 ads and 2 organics while Microsoft Live produced 3 ads and 3 organics.  I have seen varying numbers on it, but the vast majority of users prefer to click on an organic result when searching vs. a paid result, so I imagine that this approach would eventually start to wear a bit thin.  In addition, as the markets moves towards parity in the quality of results, I can imagine that there will be interesting pressures on Google (and its competitors) relative to the real estate they take up on advertising.




Disruptive threats
Another potential issue Google has is that there are a number of new ways to search for things on the internet.  For example, I am a user of del.icio.us and when I search for information there, I often get very interesting results back.  What would constitute a real threat is if some of these new types of search engines avoided acquisition and started merging together in a couple of years:  Digg, del.icio.us, & Snap.com for example.

Google is a company I admire and I still use it constantly, but I am just wondering whether I should be buying the stock (at it's hair-raising multiples) or shorting the stock…Are you seeing these same patterns in Google?  Do you agree/disagree?  Why?

 

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Originally published Dec 4, 2006 11:50:00 AM, updated July 28 2017

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