Google and Microsoft

Google (GOOG) reported Q1 2006 results yesterday. The headline numbers hid some sequential weakness in earnings growth, and so far Google has not shown significant revenue beyond its search advertisement and AdSense franchises. [I don't own Google stock, but I use AdSense.] There was some good discussion with analysts. You can check out my summary of the analyst conference at www.openicon.com.

With the possible exception of Oracle, of all the "next Microsofts" investors have bet on in the last 20 years, Google has come closest to fulfilling that promise. Though it had years in the wilderness, it market cap swelled for more quickly than Microsoft's did in the mid-1980s.

Meanwhile, investors show little confidence in Microsoft (I own the stock and worked freelance for Microsoft from 2000 until 2006). Microsoft is due to report on April 26th, with the analyst conference beginning at 2:30 PM Pacific Time (see my MSFT page for previous conference summaries, and this one when it is posted). Today, using www.nasdaq.com figures, Microsoft stock is selling at 24.5 times trailing earnings and Google stock is selling at 49 times trailing earnings. Clearly that is a vote of confidence in Google's growth potential.

Microsoft revenues in Q4 2006 were $12.5 billion. Google had $3.21 billion in revenue the same quarter, so Microsoft is still about 4 times larger. It is also much more diverse. This company that began by selling the BASIC programming language to early microcomputer enthusiasts made its first really big money when it was selected to supply the operating system for the first IBM brand personal computer. That operating system has evolved into Windows Vista. In the meantime Microsoft added its Office Suite, the Visual Studio programming interface, and the XBox 360, to name some notable successes. It has also had some failures.

One big question going forward is whether Microsoft can gain market share in the highly-lucrative search market. Which is to say, in the targeted ad market. While the crew at Google is quite impressive, there is some real danger to Google, and not just from Microsoft. Yahoo has a new search algorithm for ad placement, and smaller search engines like Ask should not be ignored. But Microsoft's profits would go up if it abandoned Internet search altogether. Google has not yet proven it can make any other revenue model stick. Given its bankroll and its brains, I do expect Google to bring out products (or turn some existing products) with revenue streams that will please investors. But Google's big acquisitions, YouTube and DoubleClick, are extending the current franchise rather than branching out into truly different IT areas.

Microsoft had, for all practical purposes, a monopoly on microcomputer operating systems that it still has today. Linux is still more of a threat than an actual competitor. Google has no such safety margin. Microsoft search is not a danger to it, but Yahoo, another "future Microsoft", in many ways is ahead of Google in diversification and has a truly substantial share of the search market.

The days of hyper growth at Microsoft are over, but the stock pays a nice dividend, there is a huge stock buyback program, and growth keeps happening. Google has more potential, but it also has more risk. Choose either, both, or neither; you will probably be fine.