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Fast Forward
Things change fast online--even for GOOG
What Livedoor can tell us about where Google's stock price is going.
By David Kirkpatrick, FORTUNE senior editor

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NEW YORK (FORTUNE) - Some people find Internet valuations awfully high -- at least for one (ahem!) major company. A few have gone so far in light of the supposedly disappointing earnings report from Yahoo and others to say we may be about to see another Internet bubble bursting. Whether that's true or not (I don't think it is) it's still a reminder to look past the flash to the fundamentals of Internet businesses.

The recent stock market chaos in Japan following revelations that Livedoor, a major Japanese Internet company, may have some financial problems shows what can happen when Internet valuations get out of whack. Livedoor's stock dropped by the maximum amount permitted by Japanese regulations for several days in a row this week.

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But just because a bunch of nave individual investors piled in and piled out of an Internet stock like Livedoor doesn't say anything about how viable the Internet is as a business environment. It's salutary to contrast Livedoor's flashy Takafumi Horie with Hiroshi Mikitani, CEO of Rakuten. His Japanese company dominates online shopping and is a major Internet auction site and portal there.

It has accomplished much of what Horie only dreams about. For instance, while Livedoor tried and failed to buy a baseball team, the Rakuten Eagles start playing soon in Sendai. The point: well-run Internet businesses are more powerful than ever.

Speaking of powerful Internet businesses....

So Google (Research) marches on, but into an uncertain world. It continued this week to prove its ambitions go beyond the Web by buying dMarc Broadcasting, which has an automated system to place radio ads. (See my piece in Fortune on Google's ad ambitions here.)

Yet voices are increasingly asking if the company is overreaching. As I write, the stock is down about $50 from its recent high of $475.

I wasn't the only one recently to speculate (in my year-end predictions) that Google could face heavy sledding this year. But now, with the amazing rapidity that is a hallmark of the Internet era, I'm hearing more and more people raise concrete questions about the net phenom's actual future business prospects.

A research report issued Wednesday by Scott Devitt at the small Stifel Nicolaus firm in Baltimore, when the stock was still at $467, urged owners sell at that price. Devitt noted that Google was the 16th largest-capitalization company in the world, and wrote, "Based on 2006 EPS estimates, an owner of Google is paying 54 percent of the enterprise value of Microsoft for 12 percent of the free cash flow."

In an interview in Business Week Online, Standard & Poor analyst Scott Kessler says Google's stock is too high and that the company is facing tough competition in search and advertising from Yahoo (Research), Microsoft (Research), and even Fox Interactive Media. And a study this week from Keynote Systems found that Yahoo and MSN are closing the gap with Google on the quality of their search.

But don't draw any conclusions too rashly. Keynote also says that Google remains the clear favorite among the 2,000 consumers they studied, and a separate Keynote study found that Google is making major progress in China, a market where it has up to now been challenged. Consumers there now rate it the best search experience, even though local player Baidu still dominates search.

For all this, what struck me most this week about Google was a posting on the blog of my friend the venture capitalist Fred Wilson.

"I have had this sneaking suspicion that much of Google's leadership comes from its brand and positioning and not from superior services," he writes. "...Let's look beyond search. Who is the leader in CPM advertising - Yahoo! Who is the leader in personalization - Yahoo! Who is the leader in behavioral advertising - Yahoo! Who has the best web-based RSS platform - Yahoo! I could go on and on."

Google remains, nonetheless, our most impressive -- by far -- Internet company. It has proselytized the Web experience to the most people. It has been enormously creative and entrepreneurial. (It even launched Google Earth on the Mac last week.)

But to think, as so many investors and Wall Street analysts seem to, that Google is categorically different than Yahoo, or indeed from any of the GEMAYA -- Google, eBay (Research), MSN, Amazon (Research), Yahoo, and AOL -- companies I've written about before, may be risky, at least if you invest accordingly.

With Google's $126 billion market cap remaining 2.6 times that of Yahoo's $49 billion, some kind of leveling-out may be overdue. If you don't think that can happen, ask shareholders of Livedoor.


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