Let's see. Google's record market cap gain on Friday was actually a squeaker. At $66.9 billion it easily passed in one day the entire $50 billion market cap of Caterpillar's global heavy machinery and engine franchise built up over a century. But only by a hair did it best Cisco's $66.0 billion gain on April 17, 2000.
But perish the thought that Friday's fireworks had any resemblance to the shooting star act of Cisco and hundreds of other tech high-flyers 15 years ago or the epic bloodbath that commenced shortly thereafter.
Then again, something was going on with the GOOG beyond the fundamentals. Notwithstanding that Google is one of the most fantastic value creating enterprises on the planet, there was nothing in Friday's earnings report for Q2 that warranted a 16% re-rating of its market cap.
Indeed, the $345 million or 9.6% gain in net income from the prior quarter was not much of a talisman. Fully 75% of the gain was accounted for by a lower tax rate (from 22.1% to 20.7%) and a cutback of what had been ballooning G&A expenses (from 8.8% of sales to 8.2%). Aside from these benefits at the margins of what is a $70 billion sales machine, net income grew at an unremarkable 2.9% over prior quarter and 7.4% over prior year.
Yet Friday's re-rating was considerable on a valuation basis. GOOG is entering corporate middle age as it presses upon the law of large numbers, and even with the Q2 uplift its financials clearly show its age. During the three and one-half years since CY 2011, Google's growth rate for both sales and net income has slowed to 15% per annum.
Consequently, it is hard to see why its LTM net income of $15.1 billion was re-rated from 26X to 31X in less than two hours' trading. That's especially the case because 90% of GOOG's revenues are from advertising, and even the digital ad portion of that space is slowing and getting saturated by GOOG's preponderant market share.
To wit, the global market for digital advertising outside of China (which lies unavailable behind red-coded firewalls) is projected at $140 billion for 2015. This means that GOOG's projected digital ad sales of $65 billion this year will compute to a 46% worldwide market share.
Moreover, digital ads already account for 35% of the total worldwide ex-China advertising spend. So the easy digital share gains have been had and no one—–not even the madcap money printers running the central banks—-has eliminated either the business cycle or the cyclicality of ad spending.
