Semester Paper: Financial Analysis of Google vs. Yahoo

Michael McClure, Keenan Burke-Pitts, Sam Herrick, and Sean NoblePrinciples of Finance- MGMT 260December 6, 2010

Contents

1. Abstract 2. Appendix 3. Introduction 4. Background Information on the Industry 5. Corporate History and Information 6. Financial Ratios7. Stock Analysis8. Present Day Economy Turmoil

1

AbstractThis report contains financial information, data, graphs, ratios and analysis on Google and Yahoo from 2006-2009. Both firms are in the sector of Technology Services and are part of the Internet Software/ Services industry.

AppendixFinancial Ratios were computed using the annual data accumulated from financial statements of both companies at cnnmoney.com.

Inventory was unavailable in both company’s financial statements.

The stock price for both companies was not averaged for the full year like the other financial numbers. Stock prices used were specific to the date of either the closing or opening of the depending quarter.

Preferred stock was unavailable in both company’s financial statements.

Interest expense was unavailable in both company’s financial statements.

IntroductionThroughout this report the reader will gain a better understanding of the Internet Software/Service industry and more specifically the well-known firms Google and Yahoo. This report will also supply information on how two firms in the same industry can be compared and contrasted through financial reporting. This reporting and analysis specifically consists of the financial ratios and the firms stock prices. The current financial market mayhem and the affects it has had on the performance of both Google and Yahoo will also be discussed.

Background Information on the Industry

In the Internet Software/Service industry there are many leading super powers. A few of these competitors include big names such as Baidu, Akamai Technologies, Yahoo, and Google. These companies compete for the maximization of bandwidth for their users making daily searches for information across the World Wide Web. These companies strive to be the best in their industries to provide the best services to their customers/ users. The more servers that a company can acquire the faster the data can be accessed resulting in more data can be supplied to the users. Servers are bought and set in place with profits that these companies make. The ultimate goal of these companies is to make and provide the best services to their customers while acquiring the maximum amount of profits. Two companies out of these four do this very well; Google and Yahoo strive to offer the fastest services possible for their users and shareholders.

Corporate History and Information

Yahoo

When it comes to search engines there are two super giants that come to mind. They are Google and Yahoo. The older of these two super giants is Yahoo. Yahoo was founded in 1994 by Jerry Yang and David Filo with is head quarter in Sunnyvale, California. In being a global company, Yahoo provides a wide variety of services and products to its customers worldwide. It is probably best known for its search engine, Yahoo search, but also features other services on its site as well. Some of the other features that the site offers are; Yahoo Directory, Yahoo Mail, Yahoo News, Yahoo Maps, and Yahoo Video (which enables users to video chat). In the early mid 90’s Yahoo grew tremendously. In being a web portal Yahoo’s stock soared upwards during the dot com era. As of 2009 Yahoo has 14,000 employees. Its stock is currently trading at $16.33 and had its all-time highest trading value of $118.75 occur in January of 2000. Since then the stock has done well but not come close to reaching that all time high yet. In the most recent weeks rumors of a merger of AOL and Yahoo have been circulating the internet. This merge would make Yahoo and AOL privately equitized however both companies deny any such rumors and assure that no such trade has been discussed. Today, Yahoo has a market cap of $23 billion.

Google

The younger but still powerful company Google was founded by Larry Page and Sergey Brin. At first the company was privately owned and founded in 1998. It was not until late 2004 that the first public offering of Google went out to auction. Google’s current headquarters location is in Mountain View, California. Google along with Yahoo dominates the search engine web space. With several hundred million searches per day, it is safe to say that Google is a giant in the online world. Google runs over one million servers in data centers all around the world. Google also runs about 24 peta-bytes of search data every day. Retrieving information from all over the internet, Google combines information relevant to each specific user’s search. Within a matter of seconds any person from all over the globe can be provided with a multitude search results. This completely depends on how specific or broad of information they are inquiring about. Google, like Yahoo, offers other services as well. Some of these services include Gmail, Google search, Google Buzz, Google Finance, Google Maps, Gmail, Google Desktop, and Google Talk. Google also has many subsidiaries as well. They include big names such as YouTube, Double Click, Grand Central, Picnik and On2 Technologies. Google is currently being traded at $578.50 and has a market cap of $142.5 billion.

Stock Analysis

Google and Yahoo stock prices and % change (2006-2009)

Jan. 6 Dec. 29 Jan. 5 Dec. 28 Jan. 4 Dec. 26 Jan. 2 Dec. 31Google (GOOG) $465.66 $578.09 $487.19 $702.53 $657.00 $300.36 $321.32 $619.98 $465.66 $619.98

% ChangeYahoo (YHOO) $43.21 $25.54 $27.74 $23.45 $23.16 $12.34 $12.85 $16.78 $43.21 $16.78

% ChangeAccording to Google Finance

-61.17%-40.89% -15.47% -46.72% 30.58%

2006-2009Jan. 6, 2006- Dec. 31, 2009

33.14%

2006 2007 2008 2009

24.14% 44.20% -54.28% 92.95%

The data above displays the stock prices of Google (GOOG) and Yahoo (YHOO) from the beginning of each calendar year ranging from 2006 to 2009. In addition to the firm’s stock prices, the percent change of the stocks from each specific year can be seen.

The Google stock data shows that the firm’s stock has increased from $465.66 on January 6, 2006 to $619.98 on December 31, 2009. This percent change in stock has a positive increase that computed out to be 33.14% between the periods of January 6, 2006 to December 31, 2009.

The Yahoo stock data shows that the firm has decreased from $43.21 on January 6, 2006 to $16.78 on December 31, 2009. This percent change in stock has a negative increase that computed out to be -61.17% between the periods of January 6, 2006 to December 31, 2009.

Google stock (2006-2009)

This graph was supplied by cnn.com and shows the changes in stock price per year for Google. It can be seen that at the end of the calendar year of 2007 the stock price increased drastically. It can also be seen that ¾’s of the way through the calendar year of 2008 that the stock price decreased to a record low price for the years 2006-2009.

Yahoo stock (2006-2009)

This graph was supplied by cnn.com and shows the changes in stock price per year for Yahoo. It can be seen that Yahoo’s stock price started to decrease in January of 2006 and kept a steady decrease to the end of December of 2009.

Google vs. Yahoo percent change in stock price from Jan. 6, 2006 to Dec 31, 2009

The graph above was supplied by google.com and shows the percent change in the stock price from Jan. 6, 2006 to Dec 31, 2009. This graph measures the percent change starting with Jan. 6, 2006 and the daily stock price.

Fortunately for Google, the percent change was positive throughout the majority of the time 2006-2009. Google however had a brief percent change that decreased to be negative that occurred only for two periods of time throughout 2006-2009.

Unfortunately for Yahoo, the percent change has been negatively decreasing ever since January 6, 2006.

Google, Yahoo, and NASDAQ percent change in stock price from Jan. 6, 2006 to Dec 31. 2009

The graph above was supplied by google.com and charts the percent change in stock price from January 6, 2006 to December 31, 2009. It can be seen that Google is for the most part above the NASDAQ’s percent change which is a positive aspect for the company. The chart also shows that Yahoo is below the NASDAQ for the whole time period of 2006-2009 which is negative aspect for the company because the NASDAQ numbers contain this specific industries competitors.

Present Day Economic Turmoil

It is no mystery that with the current financial turmoil, particularly from 2006 through 2009, that many companies stocks flourished and had investors worried beyond belief. Google in particular saw a huge decline beginning January of 2008 all the way until December of 2008. The 12 month decline saw a high of nearly $700 per share, and by the end of the year saw the stock drop below $250 per share.

Google, represented in Red, shows the dramatic decline from the beginning of 2008 all the way until the companies beginning ascent in 2009. An article from “Google good news” in March of 2008 stated that Google was ready for a bad economy. Google was never really worried about falling into bankruptcy because of its ability to draw advertisers due to Google’s high number of customers. Google CEO Eric Schmidt said “We believe that if there were a US recession, we’ll be positioned. We’re not particularly dependent on any one particular market. There’s not a lot of advertising for any one market over another.” With Google’s outstanding reputation and rated America’s number one search engine, It’s no surprise that Schmidt is spot on with his theory. Another article from an April 2008 stated that even though Googles stock was dropping, they were still not worried about the fading economy. CEO Eric Schmidt was still sticking to his word that “It is clear to us that we are well positioned for 2008 and beyond, regardless of the business environment that we find ourselves surrounded by.” The company has an incredible and highly targeted advertising business which will only improve growth, and with companies coming from overseas to advertise and invest, more and more foreign accounts will be opened, thus only improving the companies stock. In 2008 the company for the first time ever had a majority of its revenue coming in from overseas.

However, Google still has some kinks to work out if the company plans to succeed in the future. The company “relies on short text ads that appear nect to search results and on other websites.” Because these ads are more targeted and are used by marketers to link to their particular sites, there will be a slowdown because tehre are no banners or graphic ads like that of Facebook or Yahoo. Yahoo is the leader in the sale of display ads and companies with graphics will rely more on investing with Yahoo.

Yahoo is another very similar search engine to Google that has been known to be a “second place” to Google. Unlike Google’s steady ascend back into being at an all-time high, Yahoo has found itself to be coasting at a very low $16 per share. With the recession hitting hardest from 2006 thru 2009, Yahoo has struggled. In the beginning of 2006, Yahoo was at an all-time high of $42.31 per share and seemed to be steadily increasing. However by the end of 2008, Yahoo

had reached an all-time low of $9.31 although over the past two years Yahoo has stayed close to the 20 dollar mark, it still had not seemed to make any strides in company growth.

The chart above shows Yahoo’ stock rapid decline over a five year period. Yahoo is taking strides to make it become a more powerful search engine. For example it is also reaching out to more offshore accounts for advertisements as Google has done. It is also spending millions on various marketing campaigns in order to let people know that Yahoo is making advancements and looking to the future rather than hoping for the best. Yahoo CEO Carol Bartz saif “We’re bumping along bottom. Every time some sector gets excited over some good news, another one experiences some steps back.” Yahoo needs to have all sectors start to experience having good news.

Works Cited

"Google Inc.: NASDAQ:GOOG Quotes & News - Google Finance." Google. Web. 06 Dec.2010. <http://www.google.com/finance?q=goog>.

On, By Clicking. "GOOG - Google Inc. Stock Quote - CNNMoney.com." Business, Financial, Personal Finance News - CNNMoney.com. Web. 06 Dec. 2010. <http://money.cnn.com/quote/quote.html?symb=GOOG>.

On, By Clicking. "YHOO - Yahoo! Inc Stock Quote - CNNMoney.com." Business, Financial, Personal Finance News - CNNMoney.com. Web. 06 Dec. 2010.<http://money.cnn.com/quote/quote.html?symb=YHOO>.

"Yahoo! Inc.: NASDAQ:YHOO Quotes & News - Google Finance." Google. Web. 06 Dec. 2010.<http://www.google.com/finance?q=yhoo>.