I totally agree that one slight hick-up in the Google revenue model with significantly impact this stock. At these current valuations, Yahoo is a better value play if you are interested in buying one of the two internet giants. I have just published my GOOG vs. YHOO comparison analysis on

http://www.etstockideas.blogspot.com

Google is a very risky stock and getting riskier. There are numerous stocks that have appreciated 20% in the last year with far less risk and far more certainty of being around in ten years. Google's move up has been done with great volatility. Let's say it doubles again in the next two years so it is only looking up at Exxon in valuation. 100% gain would be wonderful, but does advertising revenue equate with the power of energy? Does this make any sense. Time to take some profits if you have been on this ride and diversify if you have not done so already.

While I agree that Google is a risky stock, your reasonings are fairly tweaked, and occasionally even downright incorrect. For instance, Microsofts stance on Google Spreadsheets is meaningless, considering the bitter rivalry between the 2. Additionally, Google now gains revenue from more than just ads, using Google Checkout in combination with Google Video and Google Base.

Google is not over valued based on any reasonable price/earnings multiple. Infact, one could argue that it is undervalued.

On the YouTube deal:
What is a Web2.0 bubbly dot-com like YouTube really worth? I have no idea, since they don't publish revenue numbers. But let's put it into perspective.

Google risking 1.3% of its own MktCap on this bet (at the time it was announced). If you were running your own business, would you risk 1.3% of your business's assets for a chance to grow the business? 1.3% is really insignificant chump change for Google, esp. since none of it will be in cash. So even if YouTube turns out to be a bust, it was worth the risk from a financial perspective. But what was this risk all about? What is Google actually betting on?

This move to acquire YouTube wasn't just about YouTube. Being the clear leader in the online video market, YouTube setup itself up pretty well as a prime and juicy acquisition target. Microsoft and Yahoo! were rumoured to be in talks with YouTube as well. Reading between the strategic lines, I think that this was also about making pre-emptive strike against its competition.

I think what Google is also saying here with its purchase of YouTube is that the market for online video is much bigger than $1.65B and growing even bigger each day. And I think Google does not want to miss the boat in the online video phenomenon, much like how it totally missed the boat with Orkut and the social networking market. So, I think this move was also about learning from past mistakes.

So once you put it altogether and look at the bigger picture, risking 1.3% of your MktCap at the time is not such a big price to pay for expanding the moat, and capitalizing on new emerging markets.

And I feel that recognition should be given to the cleverness and intelligence of striking a partnership with those who were going to sue your acquisition target. Instead of spending millions in legal fees fighting each other, why not MAKE millions by partnering together? Gotta love that compelling argument - it also shows that Google is going into this with eyes wide open.


On the one Trick pony argument:
Before jumping on the "Google is a one-trick pony" bandwagon, consider the following basic points:

1) online advertising models have evolved over the past decade or so.
http://www.wsworkshop.com/money/ad-revenue-models.html

CPM, CPC, and CPA each has its own addressable market, just like how SUV's target a market that is different from the market for 2-dr coupes. VCLK competes in the CPA market, Overture competes in the CPC market, and DoubleClick competes in the CPM market. But the Big GOOG competes in all three markets.
In short, the online advertising market is quite vast, and very diverse even within the market, similar to how the market for automobiles or even online auctions is a very diverse market.

2) Google has rolled out quite a few non-search products in the past year or two. There are many ways to monetize a product: subscriptions, commissions, licensing, advertising, etc. But to focus first and foremost and right away on how to monetize a product is to miss out on Google's Number 1 philosophy.

3) It's not that Google doesn't care about making money. It's just that its approach is unlike conventional companies. Anyone who has visited Google's Corporate Information page should know that the #1 philosophy of Google is......
"Focus on the user and all else will follow."

This philosophy has a bit of a Taoist philosophy incorporated into it.
For example, Google developed and operated its core search engine for years and years with no revenue model. The monetization of its core search engine evolved from its focus first on the end user experience. Google Maps is following the same path - starting with absolutely nothing, a clean slate and a blank sheet, create an entire world-wide community of loyal developers who fervently evangelize the GMaps product by creating innovative GMaps Mashups. Only now is Google beginning to address how to monetize GMaps.

I personally believe they are getting the popularity of there other projects beside core search business this way.

The stock market has a way of overreacting - both to the upside and downside. Look at QCOM at the end of the last century. GOOG could just as easily go to $1000 as it could go to less than $100