Google’s Strategy: My Simplistic View

  • Posted: 01 June 2010 04:36 AM #61

    Mace and Roman…

    IMO, our views are shaped by a mentality of… Is the glass half full or half empty. I will try to further accentuate the half full view…

    1. Stocks typically try to anticipate the future before it occurs. Google?s stock appears to be forecasting a decline in fundamentals. I believe that in this case, the charts and stock price are wrong from a long term point of view. Google?s stock can turn and move sharply higher before the business fundamentals change or improve. Stocks can dramatically power higher after times of great stress well before the fundamentals change. Numerous stocks went up over 100% before the fundamentals changed or improved in 2008. Therefore, waiting for the fundamentals to change can be a huge error as many stocks become substantially over priced before their fundamentals catch up. Waiting may eliminate the chance to get in at favorable risk reward point.
    2. I find charting to be a useful tool, but I place more weight on fundamentals as it better fits my investment strategy. I want stocks that I can hold long term without generating taxable events. Chartists are likely to generate numerous trades, defeating my long term strategy of buying and holding the ?right? stocks. I doubt that anyone could make more money trading Apple stock then just holding it since 1997. Of course, I?d also make that argument off the bottom of 2008 as well.
    3. Charts can be broken across the board due to macro events instead of fundamental micro events. Currently, we are in an environment where the charts are broken and not a useful indicator for the future as macro events are dictating price movements instead of business fundamentals.
    4. If charting was as reliable an indicator of price movements as people believe everyone would do it causing the returns to decline to the mean.
    5. During the Great Recession of 2008, most companies YOY revenue declined.  I believe it is misleading to view the revenue chart of Google out of context of this major event as most growth stocks have a similar bump in their revenue charts. Therefore, IMO the revenue chart is not indicative of a fundamental deterioration in Google?s business. Note: Apple was an unusual exception as they grew their revenues through the entire period due to the Iphone, but their PC and Ipod businesses growth substantially declined. Apple?s growth rate in PCs has resumed but it is still below the levels in 2007.
    6. Google?s business model generates great operating leverage. Last quarter?s YOY revenue growth of approximately 20% was accompanied with approximately 35% of YOY profit growth. I?d argue that Google is too cheap based on the current growth rates. The chart cited shows a trend of a rebound in revenue growth indicating higher numbers in the future. Advertising revenues are a trailing indicator which bodes well for future revenue growth rates that are higher than those mentioned above. Note that Google?s trailing PE of 22 is accompanied by approximately $85 per share in cash and no debt.
    7. If Google?s strategy fails to generate growth or a protective business moat for their search business they can abandon it. Their current bottom line profit growth of 35% YOY would be substantially higher if not for their strategic investments. Google?s strategic investments are masking a business model that is growing profits at a much higher rate than it appears. This is indicative of the incredible operating leverage of their business model. I still believe that Google?s strategy is sound and do not believe it is in their long term best interest to try and monetize these initiatives before they reach critical mass in the aggregate.
    8. It is well know that China is growing substantially faster than Europe and the US and that the internet is substantially more mature as compared to China.Therefore, it is not surprising that Baidu is growing at a faster rate than Google. Baidu has a trailing PE of nearly 100 and the stock has performed exceptionally well this year. Baidu is not pursuing the kind of initiatives that Google is. Therefore, Baidu?s bottom line is not being reduced in the same way as Google?s. Because of Google?s much larger size, Google has more operating leverage and can out invest Baidu. It is for this reason that BAIDU will never be competition for Google outside of Asia.
    9. Most telling of all, there are interestingly similarities between Google?s revenue chart (as cited by Mace) and Baidu?s (which was NOT cited). The revenue growth slopes are similar even though Baidu?s are absolute numbers are higher. Comparatively, they both appear to be rebounding in a similar fashion. This is telling, as most view Baidu?s fundamentals positively and Google?s negatively. I believe this is a function of stock performance and not fundamentals. People appear to be viewing similar fundamentals based on stock performance to fit their personal views. In other words, statistics don?t lie, people do. See Baidu Revenue Chart at http://ycharts.com/companies/BIDU/revenue_growth vs. Googles at http://ycharts.com/companies/GOOG/revenue_growth
    10. I stand by my “glass is half full” view that Google’s fundamentals are strong and the stock remains a long term opportunity and critically important holding.

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  • Posted: 01 June 2010 02:32 PM #62

    Is search a commodity? Many people here believe it is and that for example Apple can just develop their own search and replace Google’s. The reason why it is not a commodity is because Google splits its profits with their partners (platform & websites). The advertising scale that Google commands creates more profits for the partner than if they used a competitors search engine. Most platforms or site owners want to maximize their adverting profits. Google’s size and scale enables a model that other search providers can’t compete with. I’d also argue that the shear size generates better information about the consumer for the advertiser as well as better search results for the party doing the search. The bottom line is that this dynamic creates an effective moat. This is the main reason why Yahoo and Bing and others cannot effectively compete in search. In conclusion, search is not a commodity.

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  • Posted: 02 June 2010 06:52 PM #63

    Steve Jobs announced this week in an interview that Apple has no interest in developing their own search and that they will continue to use Google. One never knows the future, but for the here and now… There you have it. Search is not a commodity. If it was, more companies would go after the space as it is one of the most widely profitable businesses.

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    Posted: 02 June 2010 11:21 PM #64

    Google’s Facebook problem

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    Posted: 03 June 2010 01:15 AM #65

    jeffi - 02 June 2010 09:52 PM

    Steve Jobs announced this week in an interview that Apple has no interest in developing their own search and that they will continue to use Google. One never knows the future, but for the here and now… There you have it. Search is not a commodity. If it was, more companies would go after the space as it is one of the most widely profitable businesses.

    $ is from Ads not search.  Right strategy is to explore how to do display Ads.  Apple is developing iAd to help developers make more $.

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  • Posted: 03 June 2010 06:14 AM #66

    Mace - 03 June 2010 04:15 AM
    jeffi - 02 June 2010 09:52 PM

    Steve Jobs announced this week in an interview that Apple has no interest in developing their own search and that they will continue to use Google. One never knows the future, but for the here and now… There you have it. Search is not a commodity. If it was, more companies would go after the space as it is one of the most widely profitable businesses.

    $ is from Ads not search.  Right strategy is to explore how to do display Ads.  Apple is developing iAd to help developers make more $.

    Maybe, but the street is not factoring any value into AAPL stock due to Iad. Price targets did not move upon the announcement and are not yet in the revenue models at all or to any degree that matters. On the other hand, we all know how useless analysts can be. Presently, no company in the world makes more money in advertising than Google which gives them a massive logistic head start in any new advertising space. Google acquired AdMob which did 60 million in sales last year, far more than any other competitor in the mobile space. Google’s hand is strong. I do see this as win/ win. Apple will ultimately make very good money with Iad. Google will make far more with AdMob because they will ultimately be in more devices than Apple. Price matters for market share. Google wants market share and Apple’s high margin, premium price point assures that Android is the likely market share leader in smart phones and tablets (probably by a huge margin). Therefore, and once again, Google will dominate another new frontier of advertising. Importantly, this alone may justify Google’s strategy of market share dominance in every OS space. As we move into the future more people will recognize this and GOOG stock will charge higher.

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    Posted: 03 June 2010 08:47 AM #67

    From a Macworld report
    ComScore recently reported that Facebook led all U.S. providers of display ads in the first quarter, nabbing 16.2 percent of the impressions and unseating former leader Yahoo, which got 12.1 percent of the total.

    Microsoft finished third with a 5.5 percent share, followed by Fox Interactive Media, which includes MySpace, with 4.9 percent, AOL with 2.9 percent and Google in sixth place with 2.4 percent.

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  • Posted: 03 June 2010 09:23 AM #68

    relentlessFocus - 03 June 2010 11:47 AM

    From a Macworld report
    ComScore recently reported that Facebook led all U.S. providers of display ads in the first quarter, nabbing 16.2 percent of the impressions and unseating former leader Yahoo, which got 12.1 percent of the total.

    Microsoft finished third with a 5.5 percent share, followed by Fox Interactive Media, which includes MySpace, with 4.9 percent, AOL with 2.9 percent and Google in sixth place with 2.4 percent.

    Obviously Google is a juggernaut without display advertising.  Display is an inferior advertising method as compared to search, as advertisers pay substantially more for search because it is targeted.  Interestingly, display appears to be a commodity as there is no single company dominance. The revenue breakdown appears to be based on the power of the underlying websites. This dynamic may change inside of applications on devices like smart phones and tablets. Google is best positioned to capitalize on this through Android market share supremacy and use of Admob.

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    Posted: 03 June 2010 11:40 AM #69

    Jeffi,

    I understood Google’s strength in search/Ads and that their strategy needs volume and no dominant platforms, and why they buy AdMobs.  The last post merely says that Apple shouldn’t go into search just because there is tons of money to be made as evidenced by Google search/Ads strategy.  Given current Apple’s business strategy, is more appropriate to do display Ads.

    I think you’re too enamor of Google.  You’re mixing the need for Google to do Android and buy AdMobs into doing so is a big success.  They need to do it but outcome is not certain, there is still no evidence that they are making tons of money from those projects/initiatives.

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  • Posted: 03 June 2010 02:33 PM #70

    Fortune: Google TV = cool. But Google TV Ads = $$$

    http://money.cnn.com/2010/06/03/news/companies/google_tv_ads.fortune/index.htm?source=yahoo_quote

    “...Google, through its online advertising capabilities, has trained advertisers to demand more accountability for their dollars, a phenomenon that TV Ads feeds.

    “We know these people with these interests have watched these programs and changed channels at these times,” says Mike Steib, Google’s director of TV Ads and emerging platforms. “We’ve actually been able to find that we can forecast which ads are going to perform well.”...”

    Just another strategic investment…

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    Posted: 03 June 2010 02:36 PM #71

    I don’t know if has been discussed but Google has hired 30 money managers that are managing Goggle’s $25B in what is now being referred to as the Google Exchange.

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  • Posted: 03 June 2010 07:21 PM #72

    relentlessFocus - 03 June 2010 02:21 AM

    Google’s Facebook problem

    Nothing “material” here.

    Facebook has a great site for display advertising. The problem is that display advertising is substantially less profitable then search.  As a percentage of revenues, Google has almost no display business (most from corporate owned sites). Therefore, they’re not really competing.

    Facebook cannot compete with Google in search for all of the reasons previously mentioned/ posted. Display advertising is a commodity while search is not. Search is targeted advertising and worth much more to the advertiser. That’s why Google makes so much more than everyone else. Numbers don’t lie, people do.

    Google’s OS strategy will enable them to own a large percentage of the display ads appearing in applications in smart phones and tablets. Further down the road will be PC’s and TV’s.

    If none of these strategies were to work Google would still be a great risk adjusted investment from this level (IMO- Make your own decisions when risking your own money).

    I think many of these strategies will work and begin to bear fruit over the next 6- 18 months.

    Google’s been public since 2004. How much further did MSFT grow from that age?

    I’m not going to miss getting in on Google at the best risk adjusted point (based on enterprise valuation, cash flows and growth potential) since it went public.

    Are you?

    Long Google and way, way, more Apple.

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    Posted: 02 July 2010 01:31 PM #73

    Jeffi,

    Are you referring to this death cross?  This death cross means the downtrend started since $629.51 has more downside.  Short-term, there might be a melt-up to test the validity of the death cross.

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  • Posted: 02 July 2010 11:49 PM #74

    Mace - 02 July 2010 04:31 PM

    Jeffi,

    Are you referring to this death cross?  This death cross means the downtrend started since $629.51 has more downside.  Short-term, there might be a melt-up to test the validity of the death cross.

    I don’t time markets. That’s for speculators. If I’m correct that Google can grow their earnings at 30% (or more) for the foreseeable future then it’s just a matter of time/ patience. Compounding growth is very powerful when you are paying less than a peg of 1. What’s cool about Google’s model is that it scales like no other and each dollar of new revenue generates greater margins (operating leverage). With a monopoly position, their moat is higher than Apple’s. Of course, I still prefer Apple if I could only have one.

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    Posted: 17 July 2010 09:51 PM #75

    Jeffi,

    Thought leaders don’t agree with you.  Is Google at Risk of Becoming the next Microsoft.

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