Investment-wise, I don’t know what to think about Google. Yesterday, GOOG closed at an all-time high 509.65USD.

The fact is that Google looks expensive. It’s P/E equals 65, which in other words means that investors anticipate the growth of markets on which Google makes money, and hence Google’s revenue generation, to be extremely high. If I bought GOOG today, I would have to wait for 65 years to get my money back if the company’s economics remained stable, all things being equal. That’s not healthy, but not Google’s fault either; I remember Monster Inc. trading at an equal PER back in 2000 (against 30- today). Although Monster markets are probably not as massive as Google’s, I don’t think I’m taking a big risk saying Google will trade at a 35-strong P / E ratio in 2010. Time will tell if I’m right or wrong.

Looking at the income statement (or make it P&L account, who knows if I get some traffic from the UK or Ireland) and the annual report makes one realize that the Mountain View 9-year old start-up derives almost 100% of its total revenues (6 bn$) from online advertising.

6 billion USD…That’s about 60% of the 10bn$ big online advertising market. The thing is that this juicy market isn’t going to grow at such a fast rate (+30% nowadays) as it is maturing: Jupiter Research predicts online advertising should grow up to 16.1bn$ in 2009, and 18.9bn$ in 2010 (that’s still a nice +15% though).

Furthermore, I’m not certain the competition will let Google foster its quasi-monopoly in paid search and ad words.

So, in order for Google to satisfy its today investors, the company should either look for new revenue paths (eg monetize its online work tools, or..search) or kill its potential competitors in the egg. There is also a third way to sustaining a competitive advantage: search has become boring. Even with Google, which provides relevant results, I find it hard not to spend time sorting the outcome. I’ve been hearing here and there that semantic search tools are ready in many R&D labs, that picture recognition, and even video recognition features are in the pipeline. As the competition is awakening, & since Google revenues derive from advertising, and advertising comes from Google’s leadership in search technology, Google may come out soon with something new and big in search.

I’m having a hard time decrypting the rationale of Google’s economics and I’d be glad if you could contribute to my better understandings leaving a comment. One thing that’s certain though: Google is an elitist company. It has perfectly understood and integrated the challenges the Western world will face in this new millenium, these challenges winding up to one concept: “human capital”. Google recruits sharp-minded, bright people only, asking for grades from high-school to college graduation, for referrals and project samples. Although I really doubt the best people necessarily get the best grades at school, focusing on recruiting the crème-de-la-crème breed is in my opinion an excellent way to prepare for the future.

Addendum 18:48: about an hour after I blogged this post, Michel de Guilhermier, a French entrepreneur mostly blogging about retail, Apple & investments, published a complementary analysis about Google hitting the 500$ psychological threshold. As a stockholder in Apple & MSFT (but not Google) – exactly like me although I sold my Apple shares 3 weeks ago (I haven’t had any GOOG for 15 months), Michel adds a comparative perspective to my analysis (those who read Tech IT Easy often have for sure noticed that I enjoy a lot Michel’s top-notch blog) that I had wrongly omitted. It’s all there.

How many times have you heard that “this new, very innovative hydrogen engine will drive a breakthrough into the automotive industry. Thanks to the great work of our R&D labs, consumers can now face the future oil shortage with no fear thanks to hydrogen-powered car engines”?

Well,  what if hydrogen-powered engines existed for more than 2 centuries? Back in 1805 (patented in 1807, on January 30th), Swiss inventor Isaac de Rivaz had invented the first hydrogen-powered car.

However, people today still dare to talk about innovative moves when presenting their so-called inventions!

What if I went to Jean-Louis Gassée in the Valley to purchase the sourcecode of BeOS, now dead but a long-time best OS, and launched it saying it’s  highly innovative, grabbing the best of Linux’s memory management, Mac OS’s usability, and MS Vista’s vista? I bet I could create quite a buzz around the lanch, and catch a ridiculous, but thinking twice no-so-ridiculous, market share in a wink at a rather low standard-updating OS re-programming price. (Okay, I acknowledge this last statement is a complete utopia)

Anyways, incremental innovation (95% of innovations in volume vs. 5% disruptive innovations) is all about listening to what the market wants, keeping the best and removing the crap from your product, copying some good features from the competition, and again, listen to your clients and build a bridge between you and them – to ensure future communications effectively happen. Believe it or not, I’ve just defined marketing.

Today’s hydrogen engines should be a million times better than those of Isaac de Rivas; today’s OSs are definitely better than what they used to be: Ubuntu is simpler than any former Linux release; Mac OS X has nice functionalities such as exposé and rapid shutdown; Vista users probably don’t realize it yet, but more than 3,000 new features were been implemented since the birth of XP. I have an old Windows 95-powered PC at home, and I can tell the difference. What the open-source community, Apple and Microsoft have done wrong in the time between was to look-down at petty or old competitors such as BeOS (and/or OS/2, an IBM-MSFT jointly ventured product at the time). Although we learn not to cheat on one’s neighbour at school, I believe not taking into account what your competitors do in the world of work is a big, big mistake.

Too bad we lost 10 years, but it could be worse. Have all car manufacturers engineers taken a look at Isaac de Rivaz’s invention pattern?