The simplest way to frame the relative valuation question is to ask whether Google’s existing and future assets will generate more future cash than Time Warner’s existing and future assets. If one assumes that Google’s only significant revenue stream will be search, this seems a stretch: search may be mind-boggling, but it’s hard to believe it will generate more cash than television, magazines, cable, movies, and AOL combined. When one also factors in the value of Google’s traffic, brand, and market cap, however, the proposition seems reasonable. In 1998, when online “bookseller” Amazon surpassed Barnes & Noble’s $2 billion market cap, many deemed this absurd. Now, with Amazon selling everything under the sun, the disparity between its $15 billion and Barnes & Nobles’ $2.5 billion couldn’t seem more sane….
So Google investors can safely ignore the hysterical Time Warner comparisons. What they can’t ignore is the risk that, at some point soon, search growth will decelerate and Google’s FCF multiple will compress as momentum investors race for the doors.