Dueling Fools: Google Bear

The last time we dueled on Google (NASDAQ:GOOG), our bear was concerned about paying $114.7 billion to buy a company with a mere $1.69 billion in trailing earnings. This time, the numbers are even more mind-boggling. Now the market is claiming that $147.2 billion is a fair price for the company, even though it earned only $2.81 billion over the past 12 months. Apparently, that additional $1.1 billion in earnings is somehow supposed to be worth $32.5 billion in market cap. Yeah, right.

This chart illustrates exactly how high into nosebleed territory Google's valuation has gotten these days:

Each of those half-dozen companies earned around as much money over the past year as Google did. Yet you could buy all of them together for less than the price of buying just Google alone. In fact, if you had bought that collection of businesses, your companies collectively over the past year would have generated more in net earnings than Google took in as revenue.

What goes up .
For the life of me, I can't understand what's so special about Google, or what merits it so vast a premium over other, extremely profitable companies. Maybe I'm just dumb. If I'm lucky, I'll be as "dumb" as Warren Buffett was during the late 1990s tech bubble, when he refused to buy into that decade's hottest stocks. We all remember how that turned out.

Perhaps the market is enamored with Google's growth, as it was with the previous generation of Internet pioneers. Granted, Google's recent past has looked phenomenal, but it's still heavily leveraged to a single source of revenue -- advertising. According to a PricewaterhouseCoopers study, the Internet advertising market (excluding access spending) in the U.S. is expected to be all of $25.5 billion in 2010. If you make these few assumptions, which in reality are quite kind to Google:

• The U.S. will be 20% of the overall market in 2010.
• Google will capture half of the world's Internet advertising by then.
• Its revenue stream will still largely be based on advertising.

... then Google is trading right now at more than twice its (generously) anticipated 2010 revenues.

Even if Google continues to fire on all cylinders, its shares are already priced for perfect execution from now until then, if not longer. Heaven help its shareholders if it should stumble -- say, if it finds that it can't profitably host the free streaming videos that made its YouTube acquisition so popular. There's a reason why value trumps growth, and that reason will very likely become abundantly clear the next time Google either misses earnings or guides expectations lower.

Company vs. stock
Yes, Google is an excellent company with world-changing products. Its search engine has helped me out numerous times, both personally and professionally. I consider the "hybrid" view on Google Maps a stellar way to figure out how to get where I'm going in an unfamiliar city. And Google News has helped me both downgrade my cable TV package and cancel a newspaper subscription by providing me the information I need at my fingertips.

Even so, the business model has a very heavy reliance on advertising -- a very fickle source of revenue, indeed. I look at the competition eyeing Google's recent growth and tremendous valuation, and I see some very cash-rich sharks circling the waters. I look at the stock and simply cannot justify its price. So as a freeloading Google customer who has never paid for a single Google service, I'm extremely satisfied. As a potential investor, I'd much rather find the next dirt cheap dream stock than risk my money here. Google's already trading as though it has won not only today's battle, but also the entire war. As such, I'll happily sit on the sidelines and wait for a better opportunity.

Think you're done with the Duel? Think again! Go back and read the other three entries, then vote for the winner!

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta did not own shares of any company mentioned in this article. The Fool has a disclosure policy.