Google: $600 or bust?

Losing steam?
When a company is priced to perfection, its warts deserve closer examination. And the lack of revenue diversity is perhaps the biggest worry. Google is estimated to have generated 99% of its $6 billion gross sales last year from a single fledgling concept -- selling relevant text ads alongside pages of search results and other Internet content.

It has been a geyser of a business, going from virtually nothing six years ago to more than $10 billion worldwide in 2005. Google has managed to capture as much as 64% of that, according to Piper Jaffray. But various analysts predict this market's growth will slow to 20% to 40% a year, beginning in 2006.

So if Google is to maintain its breakneck expansion, it'll have to outperform the market. So far, that has been easy for Google, which currently owns more than 55% of the global search market, according to comScore Media Metrix. Not only does Google handle the lion's share of the world's searches, it has figured out how to serve ads that people are more likely to click on. In the past year, for instance, Google tinkered with the way it places ads in such a way that the number of ad clicks per search increased by 33% -- enhancements that went unmatched by competitors and straight to Google's bottom line.

Stiff competition
But with growth in the search market slowing, are such gains sustainable? Or has Google plucked all of the low-hanging fruit in its efforts to glean nearly two-thirds of all search revenues? Nobody knows. But it's unrealistic to expect Google to go much above that 64% figure -- particularly with companies like Microsoft and Yahoo shoveling resources and dollars at halting Google's advance.

Already, competitors have placed some major bets that Google hasn't attempted to match. Yahoo is investing heavily in its so-called social search platform. It relies on written comments and input from users to determine the value of Web pages. That's in contrast to current search technology that relies on computers to determine the value. Of course, Yahoo's test project could fizzle. But if it or some other fledgling effort successfully improves search, Google's ability to continue gaining market share -- and propel its stock price -- would be in jeopardy.

Google could always jump into new markets. It has dabbled in a business as a media buyer, purchasing pages in print magazines and reselling them to its legions of advertisers. But this pilot project has struggled to take off with marketers. And some of Google's other horizon-broadening efforts -- from its commerce-search tool Froogle to its Google Book Library Project -- have met with mixed reviews. Rumors now are swirling about a low-cost Google PC or device, after Google co-founder Larry Page was announced as a speaker at a consumer-electronics show on Jan. 6.

Picture perfect?
Google's best shot, however, would likely be in expanding into new types of online ads. So-called branded ads, which carry corporate logos or other images, are scattered over most of the Internet. But Google has so far eschewed them for fear of slowing down its site and alienating users. This is about to change, with Google poised to add small images and icons next to its search ads.

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But even this is fraught with risk. On one hand, the major advertisers moving online -- outfits such as Dreamworks and General Motors -- may not be all that thrilled about the brand-building potential of a meager icon or small graphic. On the other hand, such images may be just enough to prompt some users to try the slimmed-down search sites of Yahoo (search.yahoo.com) and Microsoft's MSN (search.msn.com) -- both of which have struggled to differentiate themselves from Google.

Make no mistake: Google's position on the Web is the envy of every other company it competes against. And most bankers expect Google's stock to continue climbing, at least to some degree. "I wouldn't be surprised to see Google hit $500 in the next 18 months," says Ken Marlin, managing director at investment bank Marlin & Associates. But with Google nearly saturating the single market from which it derives revenues -- and easy alternatives scarce at best -- investors need to question just how much potential is left in this stock.

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