Buy Google? No, Thanks

Before I go down the path of looking at Google (NASDAQ:GOOG) and comparing its valuation with that of other companies, let me say that I'm a fairly big Google fan. I've used the company's search engine for at least seven years, and I've really grown to love its online email offering as well. I also fully recognize that this company is performing extremely well relative to its peers and that its stock deserves to trade at some degree of a premium price.

I couldn't care less that Google is priced over $400 a share: It's just a big round number, and share price, on its own, tells an investor very little. Market cap or enterprise value is a much more meaningful way to assess a company's valuation. To date, I had never bothered to compare Google's valuation with other companies, but Google's relentless price run-up has piqued my interest in getting a feel for how large a premium investors are paying for Google and how much future growth is already baked into its stock price. So, I decided to take a look at Google's market cap and free cash flow from the trailing 12 months in comparison with other well-known companies.

With the exception of Motley Fool Inside Value pick Microsoft (NASDAQ:MSFT), which sparked my curiosity in the first place, the companies below were plucked from the top of my head, based on their sheer size and long-term performance. I did not limit my analysis to competitors of Google, though some of the stocks on my list qualify, especially Yahoo! (NASDAQ:YHOO) and, to a certain extent, Microsoft.

The definition of free cash flow we've used is operating cash flow minus capital expenditures, except for GE, for which I also took cash paid for acquisitions into account because acquisitions are a recurring part of GE's growth strategy. Deeper analysis would need to be done to make accurate adjustments to the free cash flow totals above, but for ballpark estimates, standard free cash flow will suffice. It's also important to note that ExxonMobil's performance the last couple of years has been well above its average. Even with all of those considerations, Google's market cap relative to its free cash flow is shockingly large when compared with some of the most profitable companies in existence.

To look at things from another angle, in the table below, I compare Google's market cap and free cash flow by expressing them as a percentage of those of the companies above.

After looking at the numbers, I'm astounded at how Google is valued in comparison with these well-established companies. Google's price-to-free cash flow multiple of 83.3 is much higher than that sported by any of the other companies listed. Yes, Google is unique, and yes, Google's growth and stock price performance have been amazing. But at one time or another, ExxonMobil, Microsoft, Cisco, and Yahoo! were all going to set the world on fire as well and had valuations to match. In fact, it was just over five years ago that Cisco had a market cap of more than $500 billion, and the consensus view was that Cisco had plenty more growth in front of it. In all of those cases, competition and market forces eventually went to work and growth rates came way down. As I look at the numbers, it seems that folks investing in Google today truly believe that this time will be different. It never is.

None of this makes Google a bad company or means it couldn't go on to have a financial performance that none of us would have imagined. It's also important to note that holding Google shares that were purchased at or around the IPO price of $85 is a very different situation than buying shares at $400-plus now. For those buying shares today, Google would have to grow for another five or 10 years at rates that have never been seen before in order for the investment to make sense. But I just can't imagine buying shares at today's prices based on the hope that a never-been-seen-before scenario actually occurs.

Nathan Parmelee owns shares in Microsoft but has no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.