Google vs. Berkshire Hathaway

Oh boy. It figures that Google (Nasdaq: GOOG) would run into Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) eventually, but it would be a better matchup in the finals than in the Elite 8. In this case, one great team will get knocked out too early, no matter who wins.

Head-on collision
This ain't no traditional rivalry in the mold of Duke-UNC, Russell-Chamberlain, or Gators-'Noles -- but have you ever stopped to think about how similar Berkshire and Google really are?

  • Passionate leadership. Berkshire has Warren Buffett and Charlie Munger; Google has Sergey Brin and Larry Page. Either company would be lost without its driving forces at the top.
  • Started from a simple premise. Warren Buffett turned a textile manufacturer into an insurance powerhouse, then a pan-industrial, global conglomerate. Google began as a simple search engine, then grew into an advertising juggernaut, and is making its way into many offline ventures today.
  • Playing in the same league. Last December, Google's market cap actually overshadowed Berkshire's for a while. The market thinks these guys should play in the same stadiums.

Sure, Buffett is still the bigger man, with more than seven times the annual revenue of Big G. But Google is growing up fast, with a three-year average revenue growth of more than 73%, versus Berkie's 15%. And it's an efficient operator -- 16% return on invested capital puts Buffett's storied money management to shame, as Berkshire's ROIC is only 8% today.

Show me the money!
But nobody really cares whether Google beats Berkshire Hathaway in direct comparisons of these metrics. What matters to investors is the future return on our invested dollars -- and that's where Google really starts to shine.

Google's stock trades at just 19 times forward earnings today, after a 34% price slide in the last three months. The share price is back where it was a year ago. It's as if 2007 never happened, even though operating cash flow has grown by more than 60% since December 2006, and is showing no signs of slowing down. If Mr. Market was anywhere near a fair assessment of Google's value in March 2007, then the stock should be worth about twice the current price right now.

What's the story?
OK, so maybe the business model took an elbow to the ribs in the meantime. That would explain the new valuation. But I don't see the big man limping or coughing.

In fact, it's the competition that looks hurt. Microsoft (Nasdaq: MSFT) is so scared of Google that it's trying to buy Yahoo! (Nasdaq: YHOO), just to stand a fighting chance. Sorry, Redmond. It's not gonna work. Both of the proposed partners are losing market share to Google in the all-important Web search market, and are faring no better in the online advertising space. And forcing the Yahoo!s to join the Microsoft Borg will damage both of the partners. Bad move, if you ask me.

So the stock has slipped because Google's ad clicks aren't multiplying the way they used to. Well, there's a good reason for the click drop, one that actually leads to happier customers and more money in the future. I'll take an undervalued, growing teenager over a stodgy old conglomerate any day. And hey, even Buffett gets turned on by Google. Go cast your thumbs-up vote for Google in Motley Fool CAPS, and game on!

Further Foolishness:

Ready for Stock Madness? Who's going to take home the trophy? See the rest of this year's bracket.

Berkshire and Microsoft are two of our Motley Fool Inside Value picks. Berkshire is also a Motley Fool Stock Advisor recommendation, and the Fool even owns a few shares in that company.

Fool contributor Anders Bylund is a Google shareholder but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure makes a determined run for the title every year.