The Worst Stock for 2007: Google

I love Google (Nasdaq: GOOG  ) . Hardly a day goes by when I don't make at least a half-dozen searches through its simple, elegant website. Google is easily the site I visit second most often on the Web -- next to, of course. Google is fast, accurate, and -- best of all -- free.

Unfortunately, I'm not the only one who has been bitten by the Google bug. Judging from its $142 billion market cap, in spite of a mere $2.4 billion in trailing earnings, much of Wall Street is enamored with the search engine, too. And that's a problem. When a company trades at such a high multiple to its earnings, the market expects tremendous future growth to justify that premium valuation. Google's past growth has been absolutely phenomenal, yet the future is only going to get tougher.

There are two big reasons for my pessimism on Google. The first is its size. With more than $9.3 billion in trailing revenues, every percentage point in growth requires more than $93 million in incremental revenue. That's new business that must be generated while the company maintains its dominant position in its existing operations. With so much of its revenue tethered to the ever-fickle advertising market, that's an exceptionally difficult proposition. Just ask television heavyweights CBS (NYSE: CBS  ) , Disney's (NYSE: DIS  ) ABC, and General Electric's (NYSE: GE  ) NBC, how well their upfront ad sales have been lately. The fact is that advertising dollars flow to whoever has the current hot hand, and right now, that's Google. It remains to be seen whether Google can maintain that momentum long enough to justify its valuation.

My second worry is competition. Google has a tremendous first-mover advantage when it came to successfully monetizing Internet searching with contextual ads. That's a great start. Now, however, it has a gigantic target painted on its back. Entrenched competitors Yahoo! (Nasdaq: YHOO  ) and Microsoft (Nasdaq: MSFT  ) see dollar signs. Microsoft, especially, has a reputation for successfully coming from behind and ultimately dominating a market. Plus, with its war chest of cash nearly triple Google's and its cash flow from operations exceeding Google's revenue, Microsoft certainly can keep the battle going for quite some time.

The business of investing
Don't get me wrong -- Google is an absolutely fabulous company. Any company with "Don't Be Evil" as its informal corporate motto practically has to be. When you get right down to it, though, I have to agree with my colleague Shannon Zimmerman. He summed up Google in these four words: "Great Company, Lousy Investment". With Google's growth bound to slow because of its current heft, and with well-capitalized competitors eyeing its lucrative market enviously, I simply can't follow my heart and buy Google's stock.

Of course, I'm just one voice in a universe of millions upon millions of investors. Based on Google's current stratospheric valuation, I'm apparently in the minority -- at least right now. Over time, though, the market seeks out the true values for stocks and adjusts their prices accordingly. I'm guessing that 2007 just might be the year that Google returns to Earth.

While I alone will never make a market, all of us investors together do. Your opinion on Google counts just as much as mine does -- probably more, if you're a shareholder. So click here to join us for free at Motley Fool CAPS, the Fool's community investing database, and tell us what you think.

Do you think we simply ain't seen nothin' yet when it comes to Google's potential? Then sign up to rate it "outperform." Or do you think I may be on to something by being worried about its valuation? Then your "underperform" call can join mine in keeping Google among the lowest-rated CAPS picks.

The choice is yours to make. Based on your CAPS ratings of Google and the other picks in this contest, we'll declare the worst stock for 2007 early next week. So sign up and get rating!

Want to go back to the beginning of our Worst Stock for 2007 tournament?Right this way.

At the time of publication, Fool contributorChuck Salettaowned shares of General Electric and Microsoft. Disney and Yahoo areMotley Fool Stock Advisorpicks. Microsoft is anInside Valuechoice. The Fool has adisclosure policy.

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