Alphabet Inc (GOOG)

[SeriousMoney]

Online: Where The Growth Is
BusinessWeek Online, DECEMBER 26, 2005
2006 INVESTMENT OUTLOOK -- THE BEST PLAYS

New Media are luring eyeballs and ads -- and the market is betting big on Google and Yahoo!

More than 220 years ago, when the British surrendered to the colonials at Yorktown, Va., legend says Lord Cornwallis marched out to a tune called The World Turned Upside Down. Today, a media investor knows just how the defeated commander must have felt. Media's collisions and revolutions are upending our notions about which companies and technologies matter in the $1.3 trillion industry. Downloads are transforming the music business, and pay-per-view is looming for movies and cable TV, while advertising is sprinting to the Internet. The media pie is growing faster than the economy, about 7% a year, according to PricewaterhouseCoopers' most recent forecast. But what we spend the money on, and who gets it, is changing enormously. And that means the media world will see plenty of winners and losers.

The market is betting hard on Internet companies such as Google (GOOG ) and Yahoo! (YHOO ) at the expense of big conglomerates because New Media are where all the growth is. Consulting firm Parks Associates forecasts that the Net will double its share of the U.S. advertising market, to 10%, by 2010. And that's a conservative estimate. It assumes Web advertising, now a $12 billion market, grows just 14% a year, about half the current pace. More aggressively, Piper Jaffray analyst Safa Rashtchy, one of the first to spot the potential of advertising tied to Internet search results, says the growth will be more like 20% a year in the U.S. and 40% abroad. If he's right, the global Web advertising market will hit $55 billion by 2010, up from $19 billion now.

The big losers are likely to be cable companies and others that distribute programs over expensive pipes. Pricing in that business is becoming cutthroat as phone companies such as Verizon Communications (VZ ) and SBC (SBC ) Communications follow satellite-TV outfits such as DirecTV into competing with cable. Legg Mason Value Trust (LMVTX ) manager William H. Miller III says he acted on this trend in 2004 by selling shares of Comcast and using the money to add to his Yahoo holdings. "Value is migrating to new media," Miller says. "We think content is getting more valuable and distribution is getting less valuable."

If you want to bet on the New Media age, the first place to look is Google. Granted, the search engine was an easier pick eight months ago, when it traded around $200. Google now trades at 48 times the earnings Wall Street analysts expect for 2006. Is that too much? Maybe, but not if you think influential Citigroup (C ) Smith Barney analyst Mark Mahaney is right. On Dec. 9 he sharply increased his estimates by nearly 60 cents a share. Now he says Google will earn $8.84 a share in 2006, in part because it gained 10 points of market share in 2005. That puts Google's price-earnings ratio at 48. "We are removing what was an overly conservative bias in our estimates," Mahaney says...

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