Google is an amazing company.  They have not only taken search to a new level, but they have figured out how to make search and paid placement more lucrative than Yahoo! ever did or could.  As the internet has grown and as Google has increased its dominance in search, businesses worldwide have offered up staggering amounts to reach internet users on the basis of their immediate motivation or search terms.

The dramatic upwards trajectory of Google's stock has been driven by the fact that the company has been not only growing revenue at 40% + over the last year, but that in each of the last four quarterly reports Google has beaten earnings estimates by between 8% and 13%.

With a stock price at $550, Google today trades at a market capitalization of $171 billion.  The 30 or so analysts who follow the stock project that for all of 2007, earnings will be $15.24 and revenue at $11.39 billion.  In other words, Google is trading at multiples of over 15 x current revenue and 36 x current earnings.

These types of stock multiples are perfectly reasonable for a company that is growing quickly as Google has done in the past.  Google's median sales estimate for the second quarter that it reports today is $2.68 billion which is in fact a 60% growth year over year.

Google's problem is that it is already a huge company and it is coming up against the laws of size.  Its opportunities for continuing to maintain this growth are slim to none.

It has already saturated the paid search marketplace.  Internet usage in the US and internationally has peaked and isn't growing dramatically.  With limited growth prospects of the entire industry, it faces competition from Yahoo! and Microsoft.  Even if those companies can never pull themselves together, there are new Sergeis and Larrys working tirelessly in Silicon Valley trying to create a better mouse-trap.  Somebody eventually will and it will take off quickly. 

Signs of saturation are clear such as when executives and analysts talk about China as the next great growth frontier for the company.  We've seen this from Starbucks and Walmart in recent years too and it is generally a sign to get out.  China is a growth market for someone, not everyone.  In regard to the internet, the players in China are set and they don't include Google.

Another sign of saturation is what I call the "GE Jack Welch effect".  This is where a company starts grappling to try to maintain its past growth by using its stock price to buy anything that it can at any price in any area that could be tangentially related to anything that it is doing.  While GE had some success with this, it is more difficult in technology areas.  Since Google has yet to prove itself successful at anything other than paid placement and since the companies that it is acquiring are not necessarily the leaders in their spaces, it is hard to see any of these ventures providing the numbers that Google needs to secure future growth at the same pace.  They hit the lottery with paid search and need to keep hitting and hitting with these acquisitions.        

Google's management has been very careful to moderate shareholder expectation.  At some point, they will need to come out and say that the company can no longer maintain its growth and guide expectations down.  This could happen today or you could bet on it being a quarter or two off.  If it happens the stock will crater to a price much lower than where it is today.  

Is Google a great company?  Yes.   Has it been a fantastic investment?  Yes.   Will it continue?  I wouldn't be so certain.