GOOG Exuberance: Not Irrational

Someone needs to tell Google investors that it’s not 1999. Or maybe it’d be
better if we told the rest of the market that it is. Hey, why not
spread that vintage Internet gold dust all over Wall Street? It sure could
use some.

The undisputed search leader reported stunning
first-quarter results after Thursday’s trading session, obliterating
analysts’ forecasts. This spurred Google shares to a new high of $224 in
after-hours trading. The stock was down slightly from that, to $216, in
Friday afternoon trading, but still up 6 percent from Thursdays closing
price of $204.22.

Since going public last August at $85 a pop, Google shares have moved in the
opposite direction of the overall market, which until Thursday’s bull run
had sunk to new lows for the year (and was back in form Friday with all
major indexes taking a red bath).

One major difference between the mania over Google and the irrational
exuberance that temporarily launched numerous Internet stocks into the
stratosphere six years ago is that Google’s fundamentals are grounded in
reality. The company reported Q1 sales of $1.26 billion, nearly double the
$652 million in last year’s first quarter. If you deduct the payments made
to other companies for generating Internet traffic, Google’s net revenue was
$794 million, nearly 9 percent higher than street forecasts of $731 million.

Net earnings were even more impressive, with Google reporting profits of
$369 million, or $1.29 per share, an amazing 477 percent above last year’s
first-quarter profit of $64 million, or 24 cents per share. Analysts had predicted
per-share net income of 92 cents.

Contrast Google with the frothy ticker symbols that filled investment
portfolios in the late ’90s. So much was up in the air in the early days of
the Internet economy. Many markets were in their embryonic stages, and
billions of dollars were bet on unproven business models, fueled by
brokerage house bluster. Some companies that went public had few customers
and little revenue to speak of, though they invariably had killer PowerPoint
presentations and close friends on Sand Hill Road.

(For those of you with short memories who think I exaggerate, read this, this and
this.
Yes, those companies went public.)

For all the hype about Google, the company’s business model so far has
proven a tremendous success. Most revenue comes from “paid search,” in
which Google promises to prominently display links from advertisers on the
right side of the appropriate search-results pages.

No doubt, Google represents the Internet economy grown up. But it would be a
mistake to let the hype over Google — not to mention the stock market’s
poor year so far — obscure the fact that many Internet companies which
survived the bubble’s burst five years ago are posting solid financial
performances today.

This week alone, we heard that No. 2 search engine company Yahoo had
first-quarter net revenues of $821 million and net income of 13 cents per
share, beating estimates. Online auction giant eBay also reported this week,
posting Q1 revenue of $1.03 billion, up 36 percent from $756 million in Q1
2004. eBay’s net income was $256 million, or 19 cents a share, an increase
of 28 percent over the year-ago quarter.

There are many others, almost all succeeding — like Google, Yahoo and
eBay — because they have been able to effectively leverage the power of the
Internet in their business models. And the companies that failed to do
that — anyone remember furniture.com? — have been relegated to history’s
recycle bin.