For amusement I have been watching the share price of Google for awhile now. I remember being taken aback at the lunacy of it all when I heard the CNBC cheerleading squad call for $400 back when it was still in the $200 range.

Well, it’s been trading above $400 for quite some time now and the other day on a long car drive I did some back-of-napkin calculations to compare what gives you the greatest ROI from Google.

First, some review (at least I hope this is review 😉

The object of investing is what? It is to obtain an adequate return on capital commensurate with the risk.

Why does one buy a stock? Trick question. Most people will say “to sell it a higher price”, buy low, sell high, etc. This is why most people buy stocks, and in case you didn’t notice, most people lose money in the stockmarket.

You buy a stock to gain ownership in a business, and thus to partake in a portion of its earnings.

Circling back to the top and closing the loop: you make investments in order to generate returns on those investments. Remember that as we work through the following:

Google’s Adsense program is truly ubiquitous across the internet. Nearly everybody has those contextual text ads on their websites and they are a true bonanza for content and forum related sites. Some people are making truly stupendous amounts of money monthly from Adsense revenues.

Take a website that earns a steady $25/day in Adsense (I know a modest website that does this much and its far closer to the bottom end of the ladder than the top). That’s $750 month, or $9,000 a year in income. Lets figure $100/month for a server and bandwidth, you’re looking at net $7,800 annually in free cashflow, paid monthly out of Google and to the website owner.

Now, Google is currently trading at a p/e multiple of about 95 (!). So it’s earning about $4.50 share. Divide 4.5 into 7,500 to arrive at the number of shares of Google you would need to own to get the same earnings = 1,666. You would need to own 1,666 shares of Google to derive the same earnings as our hypothetical website earning $25/day via Adsense. 1,666 shares of Google would cost you $713,731 on the open market today.

Which gives you the better ROI? Owning shares in Google or owning a website that earns income via Google Adsense?

Consider that there is a fairly liquid marketplace for revenue generating websites and current valuations are anywhere between 1 to 5 years’ revenues. Even at the top valuation, you should be able to buy an established revenue generating website earning $25/day for around $40,000.

I think this may be the internet equivalent of the “inverted yield curve” as we see an alternate method to extract cold hard cash out of a company trading at nearly 3-digit earnings multiple that doesn’t even pay dividends.