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Tickers in this Article: GOOG, MSFT, YHOO, BIDU
Google Inc (GOOG) has been, without a doubt, the stock market's ubiquitous growth story for the past 16 months since its rule-breaking Dutch auction IPO in August 2004. It's emergence as a technology sector powerhouse has instilled a healthy does of fear into traditional heavyweights such as Microsoft (MSFT) and Yahoo! (YHOO).

Let's take a minute to do a quick recap of Google's spectacular success:
- 2005 revenues of $6.1B are a whopping 1297% higher than full-year 2002 sales.
- 2005 net income was $1.5B, or an amazing 1370% more than 2002 net income
- Even with the recent pullback, GOOG shares are up over 300% from its IPO price of $85.

With this stellar track record, its little wonder why the market continues to expect 30% annualized growth from Google in the coming years. Even with the recent drop in share price, the company's trailing P/E ratio is still crowding 70.

However, with its last quarter's earnings coming in 12.5% under Wall Street estimates, the company might finally be showing its first signs of slowing down. But, even with last quarter's earnings miss, Google has been nothing short of extraordinary.

And it's that extraordinary past performance that still seems to take center stage in the market's mind. Consider that even though the company has recently seen a couple of analyst downgrades, a quick read of analyst sentiment on the company reveals most bullish commentary is focused on pretty much one thing: Google's insanely powerful business model. Most analysts point to Google's extremely powerful business model again and again for justification of the never-ending share price increases GOOG shareholders have gotten used to, and expect in the future.

This enthusiam even spills over into other companies, such as Baidu.com Inc (BIDU). But while it's all too easy to part with financial common sense in exchange for Google's remarkable growth story, let's take a look at some other interesting, but far less encouraging statistics.

Google's excessive profits have left the firm with a sizeable cash hoard, which was only made larger by the company's $4B follow-up share offering. In fact, right now Google is sitting on about $8B of cash and short-term investments. That's about $25 per share, or 7.5% of the current share price.

What exactly does this mean for investors? It means that for every dollar of net income Google earned in 2005, it had $5.46 of idle cash sitting around earning interest. In 2002 this ratio was only $1.47 of idle cash per dollar of net income. This means Google shares are floating around today with a 272% proportionally bigger idle cash burden. And their idle cash-to-revenue ratio has increased by over 290% during this period too.

Of course, given the company's incredible revenue growth during this time, this additional burden hasn't attracted very much of the market's attention. But, as the company continues to grow towards a massive market capitalization, its revenue growth rate is only going to slow and slow as it has an increasingly difficult time finding good ways to plow its cash back into the business.

When the dust settles, investors who chase Google's growth story into the next few years may well end up with a smaller cash hoard themselves. After all, there's only so much a $100B company can do to surprise the market. Even if there's not as much blatantly obvious growth in smaller companies, finding a few successful small-cap growth stories yet to hit the institutional radar can boost your portfolio a lot more than stacking your bets on a behemoth like Google.


That's one area we focus on in the Investopedia Advisor's Undiscovered Growth portfolio (one of the three portfolios available to our members). Each month we add one or two stocks to the three model portfolios and provide detailed analysis on why we have made our selections.

In the Growth portfolio, we focus on companies that have huge potential (hence the name). Ideally, these companies are at a stage just before they really start to attract the market's attention (and that of big institutional investors with billions to invest).

So far we've been successful at finding great companies for the growth portfolio. Since launching the Investopedia Advisor in early 2005 the average stock (there were six) in the Undiscovered Growth portfolio gained 37.4% (calculated using the simple average of the six selections in the Undiscovered Growth portfolio as of their closing prices on January 30th, 2006).

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