Gauging Google's Gigantic Valuation

You can boil most of the keys of successful investing down to two key questions: Is this a high-quality company, and is this an attractive price? Unfortunately, it's usually a lot easier to figure out whether you're looking at a solid, growing company than it is to determine whether its stock is trading at a compelling valuation.

To determine a stock's real worth, start by looking at its market cap, which can be a quick way of placing an approximate price tag on a company. Just multiply the stock price by the number of shares outstanding. For example, if Home Surgery Kits (Ticker: OUCHH) has 10 million shares outstanding priced at $30 each, its "market cap" is $300 million. If Home Surgery Kits were to be acquired by another company, that company would have to cough up $300 million -- or more, since buyouts generally occur above market prices.

Google's (NASDAQ:GOOG) much-followed share price recently topped $500. Many novice investors might focus only on that per-share price tag, but the market cap is just as important, if not more so. After all, Google could execute a 10-for-1 stock split, leaving its shares priced around $50, but its overall market value unchanged.

You can get a handle on interpreting a company's assigned value in the market by comparing its market cap with those of other firms. Google's recent market cap was around $150 billion. At tickersense.typepad.com, I found a handy list of some companies valued at less than Google:

You can use market cap information like this to compare companies in similar industries, and start asking yourself some questions about Google's valuation. Does it seem logical that Google's market cap tops the values of eBay, Amazon.com, and Yahoo! combined?

For many people, the answer is a resounding yes. They see enormous promise in the company. If you find yourself waffling, though, be sure to do more research, to be certain that your initial scan has merit. This kind of review is superficial at best, but it can still give you an initial benchmark to compare companies in similar industries.

We've searched for further Googly Foolishness:

• 220 Reasons to Short Google
• The Problem With Google
• Aggregating Google
• Is Google Too Bold?

Microsoft is a Motley Fool Inside Value picks. Amazon.com, Yahoo!, and eBay are Motley Fool Stock Advisor recommendations. Follow the preceding links to try either of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Selena Maranjian owns shares of Microsoft, eBay, Amazon.com, and Wal-Mart. (Phew!) The Motley Fool has a full disclosure policy.