Sunday, April 29, 2007

Google versus Yahoo - A tale of two cities

Google Inc. (NASDAQ: GOOG) and Yahoo Inc. (NASDAQ: YHOO) are two of the 20 innovators of The Innovation Index.

“Google's sites had 528 million visitors worldwide in March 2007, a 13 percent gain from the same month a year ago, according to ComScore Inc.. Microsoft had 527 million, while Yahoo had 476.3 million, the researcher said.

The popularity of searching the Web and new sites such as YouTube helped Google grow faster than both its biggest rivals. Products such as the Gmail e-mail service, an online calendar and an online payments system are drawing users even though they aren't nearly as popular as Google's search engine.”

Google already is the most-popular Internet search engine, drawing 48 percent of U.S. queries in March 2007, according to ComScore. Sunnyvale, California-based Yahoo was the most-visited U.S. Web site in February and also had the most repeat visits of any Web site.

In March 2007 I wrote a report on Can Yahoo Catch Google? after Yahoo had recently launched Project Panama, Yahoo's answer to Google AdWords and the making of a better search mechanism.

In the last two weeks both Yahoo and Google announced their earnings for the latest quarter. Project Panama had not yet impacted Yahoo's topline revenue; however, Yahoo officials are hopeful that Panama will have some impact in 2007. The question from the investors and analysts looms is how much impact Project Panama will have when the dust settles.

When one examines the growing gap between Yahoo and Google in terms of quarterly revenue, quarter over quarter revenue growth, quarterly net income, quarterly net profit margin, yearly innovations and stock performance gains, the picture becomes increasingly clear. Google is unstoppable at this juncture! And as of recent quarter's earnings announcement, Google has achieved another historical milestone vis-a-vis Yahoo, a first in its storied existence -- The Quarterly Revenue Gap between Google and Yahoo doubled -- Or to put in simpler terms: Google's quarterly revenues are now more than double Yahoo's quarterly revenue. 2007 will mark the first year when Google's revenue and profits will more than double Yahoo's. It's not just revenues. Google has widened the gap in Quarter over Quarter Revenue Growth, Net Income, Net Profit Margin and Stock Performance. Only the volume of Innovations or Gross Innovations is an area where Google and Yahoo seem to have some parity. Which brings me to the central point: Are sheer number of Innovations (total innovations) a leading indicator on how well a company is growing, or poised to grow? Alternatively, one has to really examine under the hood and look at not only the actual number and type of new products introduced, new collaborations and acquisitions, but also current market leadership and execution to understand how well the company is growing.

Google versus Yahoo Total Revenue Comparison

In the latest quarter ending March 31, 2007, Google had revenue of $3.66 billion; Yahoo had revenue of $1.67 billion. The Revenue Gap (Google’s revenue minus Yahoo’s revenue) between Google's and Yahoo's revenue: a whopping $1.99 billion. The Revenue Gap between Google's revenue and Yahoo's revenue is now more than all of Yahoo's revenue. This is significant! Compare this to the quarter ending March 31, 2006, or a year ago, where Google's revenue was $2.25 billion to Yahoo's revenue of $1.57 billion, or a Revenue Gap of $687 million. Importantly, the Revenue Gap a year ago was only 40% of Yahoo's revenue. Google is widening its lead by leaps and bounds over Yahoo, and at current average growth rates for both companies, Google revenue will be at least three times Yahoo revenue for March quarter in 2008. Sobering indeed.

Google is growing strong not just within the U.S. but also internationally. Google Revenues from outside of the United States totaled $1.71 billion, representing 47% of total revenues in the first quarter of 2007. Finally, Google’s partner sites generated revenues, through AdSense programs, of $1.35 billion, or 37% of total revenues, in the first quarter of 2007. This represents a 45% increase over network revenues of $928 million generated in the first quarter of 2006 and a 12% increase over fourth quarter 2006 revenues of $1.20 billion.

Google versus Yahoo Quarter over Quarter (Q/Q) Revenue Growth Comparison

The actual reason behind Google's insurmountable revenue position over Yahoo is owing to the quarterly revenue growth rate of Google. Google has averaged a quarter over quarter revenue growth of 12.99% over the last four quarters. This means, every quarter, Google's revenue grows over 12% from the previous quarter's revenue on an average. For instance, Google added $458 million in new revenue in the latest quarter from previous quarter's revenue. On the other hand, Yahoo has averaged a quarter over quarter revenue growth of only 1.7% over the last four quarters. Yahoo is growing, but growing quite slowly. Google is growing, growing quite rapidly. Hence the larger Revenue Gap. What is even greater is the Quarter over Quarter Revenue Gap growth between Google and Yahoo. Every quarter, the Revenue Gap between Google and Yahoo is growing 30% or higher. First, the current Revenue Gap is greater than Yahoo’s total revenue; now, the Revenue Gap is growing 30% plus each quarter; this means every three quarters, the Revenue Gap will double.

Google versus Yahoo Net Income Comparison

To many financial analysts and investors, total revenue or total sales alone are not a key metric. They look at net income, net profit margin, and earnings per share. Google has increased the lead over Yahoo in net income as well - the net income of Google is seven times that of Yahoo. Just a year ago, Google's net income was $592 million versus Yahoo's net income of $160 million, a difference of $432 million or less than four times. In the latest quarter, Google's net income is an astonishing $1.002 billion versus Yahoo's net income of $142 million, a difference of $860 million, more than seven times. Google was making more money than Yahoo a year ago; now, it is double that amount. Importantly, Google is adding a billion dollars in savings each quarter, which allows Google to create huge acquisitions such as YouTube in 2006 ($1.65 billion - although this included cash and stock) and DoubleClick in 2007 ($3.1 billion - all cash). Yahoo on the other hand has to be content with smaller or no acquisitions, and cannot invest heavily into new innovations. Yahoo just announced acquisition of Right Media, an online advertising auction site, for $688 million (cash and stock).

Google versus Yahoo Net Profit Margin Comparison

Another barometer of a company doing extremely well and putting more money in the bank is net profit margin, i.e. net income after paying income taxes as a percentage of total revenue. Google has averaged net profit margins of over 28% in the last five quarters; compare this to Yahoo's average net profit margin of just over 9%. Google's net profit margin is more than three times Yahoo's net profit margin. Yahoo has to work three times harder than Google to make the same amount of profits. Or Google has to work three times less than Yahoo. This means Google is running a highly efficient, operationally sound, profitable machine; Yahoo is doing good, but not as well as Google. Either Yahoo has to become more efficient (bottomline), or create a whole lot more revenue (topline) to really catch Google.

Google versus Yahoo Innovations Comparison

About the only area where Google and Yahoo are somewhat equal are total innovations. In 2006, Google had a total of 75 innovations including 44 new products, 25 collaborations, and 6 acquisitions. Yahoo meanwhile had 77 innovations in 2006, including 38 new products, 37 collaborations, and 2 acquisitions. In 2007, Google has kept up the pace with 26 new innovations through April 27, 2007, including 14 new products, 10 collaborations, and 2 acquisitions; Yahoo on the other hand has 24 new innovations, made up of 12 new products, 12 collaborations and 0 acquisitions. On surface, both Google and Yahoo seem to have the same pace of innovations. Why then Google is doing so much better in all the metrics above? Three reasons: 1. Quality of innovations 2. Meaningful acquisitions 3. Execution on current strategy. For instance this year, Google was able to acquire DoubleClick in an all cash deal for a huge amount of money; for Yahoo, this would have been difficult to swallow. Google's AdWords and AdSense are head and shoulders above Yahoo's Text Search solutions - Panama has narrowed the gap somewhat, however, Google continues to introduce new elements such as the recently announced WebSite Optimizer. Yahoo is quite fond of collaborations as a way to create a larger ecosystem and grow the business, and consistently leads Google in new collaborations. However, as with all partnerships, so much is not under your control, and there is a high dependence on how well your partner will do for you. Google has done well with the AdSense partnership program, and has built a mass of content partners all around the world - Google's partner growth is viral now. Yahoo has taken an early lead on the mobile platform though, and is betting that mobile is where the games will be played in the future.

Google versus Yahoo Stock Performance Comparison

Google stock has appreciated 16% since December 30, 2005; Yahoo stock is down 27% since December 30, 2005. However, Google stock has only gained over 4% this year (since December 29, 2006); on the other hand, Yahoo has gained over 11% this year. At one stage, Yahoo stock had gained over 25% in 2007; however, the latest quarterly results from Yahoo were received less favorably by the investors, and resulted in the drop. Google also had an early rally in the year, and was in the negative territory for a couple of weeks. Google's latest quarterly results eased the investor concerns about Google's torrid growth, and Google shares have gained ground since. Google stock has not appreciated in the same realm as the revenue growth. For a company whose revenue and net income has grown 63% and 69% respectively in one year, the stock performance gain has been only 16%. This has a lot to do with built-in expectation, and Google's already lofty valuation. Yahoo's revenue has only grown 7% in one year; and net income has dropped. Investors have rewarded Yahoo accordingly.


Google is firing on all cylinders, and has the making of a juggernaut. It appears that Google can only fall if Google makes huge missteps and places big bets on the wrong horse. Google has placed sizable bets with YouTube acquisition in 2006, and DoubleClick in 2007. YouTube acquisition led to some bad press owing to copyrights and a lawsuit by Viacom. Ultimately, Google will prevail, and YouTube in the meantime has seen nothing but huge growth in viewers each month. However, it has not come without some costs. DoubleClick will not have the same issues as YouTube; although it was valued astronomically high, hence the margin for error is small. In as much as Google can create timely innovations and execute well, it is poised to expand the market leadership further, and grow the revenue higher and faster. Yahoo has much catching up to do - both on topline and bottomline innovations; if Yahoo does not catch Google in the stride in 2007, it is possible that Yahoo could be relinquished even further in 2008. A time could come in 2008 and beyond wherein Google could outright grab Yahoo's market and begin winning away Yahoo's loyal base. The Disruptive Innovation Gap was created by Google, and now Google is running forward. How does Yahoo stop Google from doing this? It is a daunting task, and will take all of Yahoo’s Panama, Mobile and Content, and then some. Fundamentally though, Yahoo has to recreate that buzz and energy that used to be Yahoo, and get users to go to Yahoo in hordes as they used to go - before Google came knocking.

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