In the first, he claims that Google is overvalued. Google has a market cap of around 45 Billion dollars, on revenues of 2.6 Billion, and an EBITDA of 500 million.
There are two basic ways to value a company. The first is the discounted value of its anticipated cash flow. (Discounted means that jam today is worth more than jam tomorrow, and I should sell you jam tomorrow at a slightly lower price, because I get the money earlier, and can make use of it. On a broader level, having $100 in hand today is worth more than $100 in hand a year from now, and the amount you’d pay to get $100 next year (about $98 at today’s interest rates) is called the discounted value. So the discounted value of a company’s expected cash flow means that a company is worth what it’s going to bring in over time, adjusted for the fact that you’ll get that money over time, and the risk that the money won’t come in.
The second way to value a company is the replacement value of its assets. This means that a company is worth what it would cost to build the same thing. This method is harder to use. In Google’s case, it requires figuring the value of several notoriously hard-to-value assets. One is brand. I visit Google an average of 15 times a day. Google’s ease of use is amazing. You could spend a lot of time and energy and not get it as right as they’ve gotten it. (I’ll make an exception for gmail, which I really don’t like. I like mail to be lightning fast, because I get a lot of it, and hate waiting. Gmail now has secure POP servers, so I can use my own tools. I’ll be interested to see how or if they advertise over POP.) The second really hard to value asset is Google’s staff. Google has collected an amazingly smart set of people on the technical side, and they seem to figure out how to make money from the stuff those folks invent. The third non-obvious asset is the ability to run a 100,000 node server farm on the cheap. Moore’s law has lead to operations costs dominating hardware costs, and running a network cheaply is very hard. I think is rapidly depreciating as they add a mix of services. I’ve gotten tired of Orkut’s bad service, and Gmail sometimes gives me a come back later message. But I suspect that in the Gmail case they’ll fix it.
So, are these hard to value assets, plus the more obvious ones like Pagerank and a fast web service, worth $45 billion?