The public excitement generated by Google Inc.s announcement that it has filed for an initial public offering that could raise as much as $2.7 billion has also revived unsettling memories of the last dot-com market bubble, which crushed so many fond dreams when it collapsed in late 2000.
But there are a number of reasons why Googles prospects are far more sound than so many of the fabled Internet startups that crashed and burned with startling rapidity during the last market boom.
Google is no Pets.com, WebVan.com, DrKoop.com or even Amazon.com in its early days. Thats because Google has all of the things that these ventures didnt–solid revenue, profits and a real business plan. With the registration of its IPO papers with the Securities and Exchange Commission, Google disclosed that it generated a profit on revenue of nearly $1 billion.
Even with these apparently bright prospects, investors should keep in mind what happened in the all-too-recent dot-com market meltdown.
So many of the extinct dot-coms went public with the intent of raising millions that they would use to build their business infrastructure and market niche—long before they had proved that they actually had an economically viable business plan or that there was a sustainable demand for their service.
These companies used venture funding for massive advertising campaigns that lent enough market recognition to their corporate names to make them bankable on Wall Street.
In those days, there was some supposed magic in the Internet that meant that the well-established rules of economics and business management no longer applied. If you were able order books, wine or pet food over the Internet, that naturally meant it had to be more efficient and profitable than any mail-order catalog business that went before it.
There was talk of “frictionless commerce” and “disintermediation”—euphemisms for getting rid of the middleman. But they still couldnt answer the question of whether customers would be willing to pay a premium to buy a 20-pound bag of dog kibble shipped overnight by express mail. The answer, it turned out, was no. It was still easier to go to the discount store down the street.
The failure of dozens of dot-coms cost stock-market investors and venture capitalists billions of dollars. Those who benefited most from these short-lived companies were mostly senior executives who cashed in their founders stock before the bottom fell out. Many of them escaped the stock-market debacle of 2000 and 2001 with their fortunes intact. Many small investors, however, are still licking their wounds.
Google, incorporated in 1998, has rapidly built a highly successful business based on search-engine technology that is efficient enough to let users search more than 4 billion Web pages. It makes its money by selling advertising linked to search results and by letting advertisers purchase premium placements for their Web links.
Google is able to do this profitably because the speed, scope and efficiency of its search algorithms make it far and away the most popular search engine on the Internet.
But despite its success, it will not be easy for Google to justify the estimated $20 billion market valuation that a successful IPO will produce for the company. While the companys growth over the past six years has been remarkable, there is no guarantee that the company can continue to grow and produce profits over the long term.
Google faces a lot of challenges. A swarm of competitors are chasing after it, including its former principal customer, Yahoo Inc., along with LookSmart Ltd., Vivisimo Inc. and Ask Jeeves Inc. This week, the Kartoo Co., a French search-software company, announced the launch of Ujiko.com, which it is pitching yet another alternative to Google.
Google is also facing lawsuits from two companies—American Blind and Wallpaper Factory Inc. and European insurance giant AXA Inc.—claiming that certain keyword searches violate their trademarks.
The issue here is whether Googles practice of letting advertisers bid on the use of keywords to get prominent display in search results inherently violates trademarks. If the two companies prevail in the lawsuits, Google might have to deal with an avalanche of such suits or severely curtail its use of any keywords that could be claimed as trademarks.
The value of Googles stock to investors will depend on the companys ability to remain on top of the search-technology market. The high-tech industrys history has shown that it is extremely hard for any company to remain on top year after year. Advances in technology have always had a way of quickly knocking companies off the top of the heap.
Before bidding up Googles IPO to outlandish heights, rank-and-file investors should recall what happened just a few short years before. Googles prospects, which seem so euphorically bright today, have to be weighed against its ability to generate investor value for the long term.