How Much Is Google Worth?

Google is worth a lot of money, more money than most people can imagine. But assigning an actual dollar amount to what the company is worth is trickier than you might think.
It is difficult to assign a value to a company like Google. The word “google” has entered the global lexicon, standing in for “web search” the way that the brand Kleenex stands in for “tissue”, as in “Give me a Kleenex.” How many times a day do you remind yourself to “google” something later? The value of a readily-identified monopoly such as Google is notoriously difficult to establish.
Rupert Murdoch’s Newscorp famously shelled out $580 million to purchase Myspace in a move that was eventually only worth about $60 million. Other Internet start-ups that were overvalued and ended up costing their investors tons of money are a dime a dozen.
Still, as of October 5, 2009 (the last solid financial figure we have), Google’s market capital was valued at $153.4 billion. To put that number into perspective, Facebook’s market capital is estimated at around $15 billion, about a tenth of the market value of Google. Since investments in Facebook are an extremely hot commodity (and probably over valued) that huge number for Google is impressive.
How Is the Value of Google Determined?
There are any number of ways to determine the value of any website, from the smallest WordPress blog to a market giant like Google. Simple methods include –
Multiplying the net annual profit by a factor of ten — This is far too simplistic a model for something as complex as Google. Valuation by ballooning a website’s profits just doesn’t work. There are too many factors that go into something like “net annual profit” for a simple economic model like this to make sense. Still, many investors use this as a “base line” for determining a website’s value.
Adding up inventory and assets — This means figuring out the cost of replicating the website and setting its value somewhere around that number. For a website like Google, “assets” is a complicated term. It could refer to the quality of content and images, the value of search engine presence, the size of its customer lists and databases, etc.
Traffic — Websites make money based on the amount of traffic they get. For a website like Google, investing based on traffic means setting a value for one of the most popular websites in the world, often ranked #1 or #2 in terms of traffic. For a diverse site like Google, the value of traffic and traffic diversity is difficult to put a finger on. Paid advertising, links, and publicity alone are worth a ton, but the amount of traffic that Google gets means a higher value.
Branding — The value of the Google brand is a big factor in figuring out the overall worth. As we said before, the term “google” is a big part of our everyday speech now. What is the financial value of a brand recognized by everyone that uses the Internet? Tough to say.
A final note on determining the value of Google — when Google went public through a stock auction, lots of small investors bought in based on their long term view of its value, not short term. After the IPO, the stock market value of Google was well above any “institutional” value determined by the above factors. In other words, Google is as valuable as the people who invest in it believe it is.
The current stock value for Google (at the time of writing) is $463.01 per share. That’s well below the high at the end of last year of around $700 per share. Ups and downs on financial markets, and the dropping value of the dollar, means that Google’s stock is less valuable than when it was first released.
How Much Cash Does Google Generate? How Does Google Make Money?
Free cash flow is a major determining factor in the valuation of Google. Free cash flow means operating cash minus expenses, and in the last four years Google has continued to increase free cash flow. In the four year period starting in 2003, Google started with about $218 million in cash, growing year by year until by 2007 its cash value was up above $1.7 billion. Investors in Google, based on these numbers, are operating under the assumption that Google can continue to increase free cash flow by about 50% a year through 2012, when Google is expected to be worth about double what it is worth today.
Microsoft has traditionally been one of the highest valued companies traded publicly. For Google to surpass Microsoft in terms of valuation (Microsoft is only valued at about $70 billion today) is a huge deal, mostly because Microsoft deals in physical commodities that can be seen and touched. Google makes its money on invisible things like industry stature, web traffic, and maybe a little ad revenue thrown in for good measure.
Investing experts tell us that the Google brand alone is worth about 70% of Google’s value, meaning their reputation still far exceeds their profitability. Google itself reports that it will bring around $60 billion into the United States this year almost exclusively through search engine value and advertising. AdWords and AdSense are cash cows for Google, and if their brand value is still almost three-quarters of their total valuation (and $60 billion is nothing to sniff at) then the potential growth in Google’s value is exciting.
Whether you think that $60 billion mark is nothing but spin (and many investors do) or that Google is still undervalued (AdSense is expected to earn its members about $2 for every $1 they spend, a decent investment) any money sunk into Google is likely to earn a return, at least in the short term.