Gimme Google
Google (GOOG)
Bought five times between January 26 and May 19, 2005 at prices from $182.20 to 239.37 (average price: $199.43)
Time to talk about Google for a moment, since they just released their quarterly earnings yesterday. Here's my one-sentence summary:
Google is the dominant network for serving internet advertising and should leverage their employees' innovation to continue that leadership as the internet itself grows in size and reach around the world.
Google and Berkshire Hathaway are more or less tied for the title of my largest holding, with each of them at roughly 10% of my portolio of individual stocks, though GOOG has grown into its position at about a 50% gain while BRKB has actually declined slightly since I purchased it. (And in the interest of full disclosure, you may have noticed that I make a very teensy amount of money through Google's AdSense program by allowing them to post ads on this site.)
I'm actually a little disappointed that Google did not decline dramatically in regular trading this morning, as I would like to be able to pick up some cheap LEAPs on Google to trade. I consider this holding to be a core one, not one that I'm interested in trading at this point -- I think the risk of missing substantial gains going forward is greater than the risk of losing the gains I have already achieved. I just don't see an end to growth, though I certainly can see growth being very lumpy for this still-young company.
(For those unfamiliar with LEAPs, they are long term options, available for both put and call. I sometimes use long term call options to leverage my position in a stock or give me a small trading position that I can use without selling my core holding. Back when the price was under $200 Google call options were actually extremely cheap, in my opinion, relative to growth -- they aren't any more, but I was hoping for a 10%+ haircut this morning that might make a bargain available)
Unfortunately, it looks like there are enough people who still want to get into a Google position and feel they missed the runup that any decline brings the buyers in pretty heavily -- we're down about 5% as I type this, but that's not much considering how gloomily the analysts are interpreting the earnings and the conference call with the CEO's muted warnings about the next quarter's growth rate. Somewhat unfortunate for those of us who want to buy more and would love to see a sale price.
First, on the earnings for this quarter:
I don't care that Google missed the average estimates slightly (though frankly, I think being within two percent can hardly be called a miss). I love that Google doesn't provide guidance, if only because it makes the analysts really sweat and earn their bonus money, but I was actually shocked at how close the average analyst came to the earnings number, just a couple cents off. I may have to reassess how smart analysts are. Now if Google had missed THEIR OWN guidance, that's another story -- that would tell you that they had mismanaged the quarter in some way, or that they didn't have a good handle on the business prospects. One very good reason not to give guidance at all, and certainly not to give quarterly guidance. In general, I think giving quarterly guidance just encourages a short term mentality and Google is following the Warren Buffett model, at least to some degree, in trying to build a huge class of individual shareholders who want to own the company (not just the stock) going forward.
But one thing I don't have to reassess is how singleminded analysts are -- they care about the current and coming quarter and that is generally all. In some cases, they care about "year from now" numbers and use those to project a price for the stock, but most of the words from their mouths are related to the coming quarter, the next earnings release, and foreseeable catalysts on the near term horizon that will move the stock one way or another. I'm not looking for the best time to sell Google in the next six months, so I'm not that concerned about the quarter's performance versus Wall Street expectations.
Google is ubiquitous, and it has become a verb -- I don't need to tell you what they do. They are synonymous with search, and have one of the fastest growing and most valuable brand names in the world WITHOUT ever having done any traditional advertising or marketing to speak of (Forbes estimates the value of the brand alone at about $9 billion -- I'd put it higher than that). That brand recognition is a large part of what investors are buying with Google, since it will remain a large part of their competitive advantage (or "moat" in Warren Buffett/Morningstar speak) in the years to come.
This is one case where being a verb benefits the company instead of weakening the brand -- unlike Kimberly Clark's frustration with seeing other facial tissues referred to as "Kleenex", I don't see a searcher going online to Google something and using any source other than Google.
So why do I like Google as an investment?
First, I like the company's culture and track record of innovation. I see this as an extraordinarily profitable advertising business that has room for great growth and spits off cash at such great profit margins that they can invest in R&D on a pretty dramatic scale. I like the company's strong focus on growing its employment base and adding more and more of the best engineers in the world -- more than 700 employees were added in just the second quarter, but even more than that I see great promise in the potential that can come from letting those minds loose. I think Google's policy of giving their employees designated time to work on their own ideas, which clearly comes from the founders and their academic backgrounds, is a brilliant way to foster a culture of innovation. This might be our generation's 3M, where even mistakes can lead the way to discoveries that create new markets (remember the story of the invention of the post-it? And 3M still tries to maintain that culture, which is a big source of their success -- one of their past CEOs says here, "You can't get innovation if you don't let people take swings. If people are going to get clobbered every time they take a swing, you don't get innovation.")
The most visible result of this is Google Labs -- if you haven't checked it out before, go to labs.google.com -- you'll see the stuff that, unlike Maps or Froogle or Scholar or Gmail, which are also all still in Beta but already better than their competitors, isn't even ready for wide beta release. Given the track record of their other products, including the new Google Earth which I love, I expect spectacular products to keep leaking out of Google Labs at even faster rates as they hire more and more of the world's best engineers and give them one of the the world's most powerful computer networks to play with.
I think there is a lot of room for truly dramatic growth going forward -- even though I certainly don't expect GOOG as a stock to remain on this 300% annual growth tear. There are two primary drivers of growth that I think are almost easy for Google -- increased internet and broadband coverage throughout the world, and increased global internet advertising spending. Good tables of combined statistics on this area are available from Internet World Stats, and the things that jump out at me are these:
I think those are growth trends that you cannot dispute or argue with, though you can certainly argue that Google might not be the dominant company worldwide that I see them becoming.
There is a good article from the SF Chronicle on the challenges that Google faces in its international expansion, including difficulty competing against entrenched local brands and services and creating quality products in other, particularly asian, languages. I expect that Google will continue growing organically as well as making acquisitions of smaller competitors. I do not particularly understand the practice of internet companies like Google investing in their up and coming competitors, as Yahoo did with Google many years ago before they were public, and Google in turn did with Baidu not long ago (Baidu, contrary to rumors that they might be acquired by Google, is filing to go public in the US).
This my biggest concern about Google, whether they will be able to scale their dominance in search and internet advertising in the United States and several other countries to the rest of the world.
What else am I worried about for Google going forward?
Volatility: obviously, Google is priced as though it can continue to grow at nosebleed levels for many years growing forward. Any hiccups in that growth could cause significant stock price declines, particularly in the short term. I'm not so worried about that, because in the end I think the business is so solid and the people have so much potential that the possibility of new avenues of growth evolving far outweighs the likelihood that they will become stagnant in the next five years.
Competition: Google came out of nowhere, so could their competition -- in theory. Google was an overnight success in search because it was wildly better than the unsatisfactory products then available. Google's competition would have to really set the world on fire to be wildly better, and with the increased size of the marketplace they would not be coming out of nowhere and I'd guess that any threatening small competitor would be very likely absorbed by one of the big three (MSN, Yahoo, Google). Google now has more than the best product in search, it also has inertia and the network effect working in their favor -- inertia because "Googling" is the default search behavior of most of the market in the U.S., and the network effect because of AdSense and AdWords. They have more advertisers than anyone else because they have a bigger and more productive network of sites, who they can pay more because they have more advertisers, and so on.
Valuation: At some point, margins will compress or growth will slow -- that' s what happens for every growing company, someday. But I would argue that Google is a long way from becoming fully grown. Look what happened with Ebay, even -- they are still off of their highs of last fall, but they dropped for six months because everyone was convinced that they couldn't find any new ways to grow and should see margin compression ... until this week, the street discovered that they are still a growth company, and a seemingly mature business suddenly saw it's market cap go up by more than five BILLION dollars in literally one day.
Google has a ways to go, and at a forward PE of 44 according to the analyst estimates (who I guess I have to start listening to since they came so close this quarter) I think today's price is pretty fair -- that's only 2-1/2 times the average forward PE of the S&P
Price: There are a lot of people who are really turned off by the $300 price tag and let that dissuade them from ever believing that the company is safe to buy. This is the Buffett influence again, and while I see the benefits of keeping the stock high as a way to dissuade day traders and speculators and try to foster a long term ownership base, I expect they will eventually split in order to remain a mainstream stock. And it goes both ways -- I think many people consider GOOG to be overvalued at $300 but would look differently at a company with projected earnings of .75 and sustainable very high earnings growth that they could get for $30. The decimal point makes a big psychological difference to some people.
I think that, senseless though it may be, a split will likely increase the price for Google a little bit at least in the short term (and perhaps increase the likelihood that GOOG will join the S&P 500 -- only Sears Holdings right now in the index has a price even half of Google's), and it will very likely increase the volatility. As someone who aspires to be a very long term holder of Google based on their future capacity for innovation and their focused and successful management, I secretly hope they never split the stock -- I'd love to be holding my Google shares in twenty years and looking at the lovely five digit prices I could get for them. But I'm holding either way. I do not expect to sell Google -- even if we have another stock market meltdown, I'll hold through it and I believe we'd see Google rise from the ashes on the other side (as Ebay did the last time around). The Internet isn't going away.
There are lots of folks weighing in on this -- I like the perspective of the search engine community, check out Search Engine Watch for one good blog with regular updates on the business.
technorati tags: Google, search
Bought five times between January 26 and May 19, 2005 at prices from $182.20 to 239.37 (average price: $199.43)
Time to talk about Google for a moment, since they just released their quarterly earnings yesterday. Here's my one-sentence summary:
Google is the dominant network for serving internet advertising and should leverage their employees' innovation to continue that leadership as the internet itself grows in size and reach around the world.
Google and Berkshire Hathaway are more or less tied for the title of my largest holding, with each of them at roughly 10% of my portolio of individual stocks, though GOOG has grown into its position at about a 50% gain while BRKB has actually declined slightly since I purchased it. (And in the interest of full disclosure, you may have noticed that I make a very teensy amount of money through Google's AdSense program by allowing them to post ads on this site.)
I'm actually a little disappointed that Google did not decline dramatically in regular trading this morning, as I would like to be able to pick up some cheap LEAPs on Google to trade. I consider this holding to be a core one, not one that I'm interested in trading at this point -- I think the risk of missing substantial gains going forward is greater than the risk of losing the gains I have already achieved. I just don't see an end to growth, though I certainly can see growth being very lumpy for this still-young company.
(For those unfamiliar with LEAPs, they are long term options, available for both put and call. I sometimes use long term call options to leverage my position in a stock or give me a small trading position that I can use without selling my core holding. Back when the price was under $200 Google call options were actually extremely cheap, in my opinion, relative to growth -- they aren't any more, but I was hoping for a 10%+ haircut this morning that might make a bargain available)
First, on the earnings for this quarter:
I don't care that Google missed the average estimates slightly (though frankly, I think being within two percent can hardly be called a miss). I love that Google doesn't provide guidance, if only because it makes the analysts really sweat and earn their bonus money, but I was actually shocked at how close the average analyst came to the earnings number, just a couple cents off. I may have to reassess how smart analysts are. Now if Google had missed THEIR OWN guidance, that's another story -- that would tell you that they had mismanaged the quarter in some way, or that they didn't have a good handle on the business prospects. One very good reason not to give guidance at all, and certainly not to give quarterly guidance. In general, I think giving quarterly guidance just encourages a short term mentality and Google is following the Warren Buffett model, at least to some degree, in trying to build a huge class of individual shareholders who want to own the company (not just the stock) going forward.
But one thing I don't have to reassess is how singleminded analysts are -- they care about the current and coming quarter and that is generally all. In some cases, they care about "year from now" numbers and use those to project a price for the stock, but most of the words from their mouths are related to the coming quarter, the next earnings release, and foreseeable catalysts on the near term horizon that will move the stock one way or another. I'm not looking for the best time to sell Google in the next six months, so I'm not that concerned about the quarter's performance versus Wall Street expectations.
Google is ubiquitous, and it has become a verb -- I don't need to tell you what they do. They are synonymous with search, and have one of the fastest growing and most valuable brand names in the world WITHOUT ever having done any traditional advertising or marketing to speak of (Forbes estimates the value of the brand alone at about $9 billion -- I'd put it higher than that). That brand recognition is a large part of what investors are buying with Google, since it will remain a large part of their competitive advantage (or "moat" in Warren Buffett/Morningstar speak) in the years to come.
This is one case where being a verb benefits the company instead of weakening the brand -- unlike Kimberly Clark's frustration with seeing other facial tissues referred to as "Kleenex", I don't see a searcher going online to Google something and using any source other than Google.
So why do I like Google as an investment?
First, I like the company's culture and track record of innovation. I see this as an extraordinarily profitable advertising business that has room for great growth and spits off cash at such great profit margins that they can invest in R&D on a pretty dramatic scale. I like the company's strong focus on growing its employment base and adding more and more of the best engineers in the world -- more than 700 employees were added in just the second quarter, but even more than that I see great promise in the potential that can come from letting those minds loose. I think Google's policy of giving their employees designated time to work on their own ideas, which clearly comes from the founders and their academic backgrounds, is a brilliant way to foster a culture of innovation. This might be our generation's 3M, where even mistakes can lead the way to discoveries that create new markets (remember the story of the invention of the post-it? And 3M still tries to maintain that culture, which is a big source of their success -- one of their past CEOs says here, "You can't get innovation if you don't let people take swings. If people are going to get clobbered every time they take a swing, you don't get innovation.")
The most visible result of this is Google Labs -- if you haven't checked it out before, go to labs.google.com -- you'll see the stuff that, unlike Maps or Froogle or Scholar or Gmail, which are also all still in Beta but already better than their competitors, isn't even ready for wide beta release. Given the track record of their other products, including the new Google Earth which I love, I expect spectacular products to keep leaking out of Google Labs at even faster rates as they hire more and more of the world's best engineers and give them one of the the world's most powerful computer networks to play with.
I think there is a lot of room for truly dramatic growth going forward -- even though I certainly don't expect GOOG as a stock to remain on this 300% annual growth tear. There are two primary drivers of growth that I think are almost easy for Google -- increased internet and broadband coverage throughout the world, and increased global internet advertising spending. Good tables of combined statistics on this area are available from Internet World Stats, and the things that jump out at me are these:
- World internet usage has climbed almost 150% in the last five years, but still reaches just 14% of the population.
- Asian users already make up 34% of world internet users, even though only 8% of the population has access to the internet.
I think those are growth trends that you cannot dispute or argue with, though you can certainly argue that Google might not be the dominant company worldwide that I see them becoming.
There is a good article from the SF Chronicle on the challenges that Google faces in its international expansion, including difficulty competing against entrenched local brands and services and creating quality products in other, particularly asian, languages. I expect that Google will continue growing organically as well as making acquisitions of smaller competitors. I do not particularly understand the practice of internet companies like Google investing in their up and coming competitors, as Yahoo did with Google many years ago before they were public, and Google in turn did with Baidu not long ago (Baidu, contrary to rumors that they might be acquired by Google, is filing to go public in the US).
This my biggest concern about Google, whether they will be able to scale their dominance in search and internet advertising in the United States and several other countries to the rest of the world.
What else am I worried about for Google going forward?
Volatility: obviously, Google is priced as though it can continue to grow at nosebleed levels for many years growing forward. Any hiccups in that growth could cause significant stock price declines, particularly in the short term. I'm not so worried about that, because in the end I think the business is so solid and the people have so much potential that the possibility of new avenues of growth evolving far outweighs the likelihood that they will become stagnant in the next five years.
Competition: Google came out of nowhere, so could their competition -- in theory. Google was an overnight success in search because it was wildly better than the unsatisfactory products then available. Google's competition would have to really set the world on fire to be wildly better, and with the increased size of the marketplace they would not be coming out of nowhere and I'd guess that any threatening small competitor would be very likely absorbed by one of the big three (MSN, Yahoo, Google). Google now has more than the best product in search, it also has inertia and the network effect working in their favor -- inertia because "Googling" is the default search behavior of most of the market in the U.S., and the network effect because of AdSense and AdWords. They have more advertisers than anyone else because they have a bigger and more productive network of sites, who they can pay more because they have more advertisers, and so on.
Valuation: At some point, margins will compress or growth will slow -- that' s what happens for every growing company, someday. But I would argue that Google is a long way from becoming fully grown. Look what happened with Ebay, even -- they are still off of their highs of last fall, but they dropped for six months because everyone was convinced that they couldn't find any new ways to grow and should see margin compression ... until this week, the street discovered that they are still a growth company, and a seemingly mature business suddenly saw it's market cap go up by more than five BILLION dollars in literally one day.
Google has a ways to go, and at a forward PE of 44 according to the analyst estimates (who I guess I have to start listening to since they came so close this quarter) I think today's price is pretty fair -- that's only 2-1/2 times the average forward PE of the S&P
Price: There are a lot of people who are really turned off by the $300 price tag and let that dissuade them from ever believing that the company is safe to buy. This is the Buffett influence again, and while I see the benefits of keeping the stock high as a way to dissuade day traders and speculators and try to foster a long term ownership base, I expect they will eventually split in order to remain a mainstream stock. And it goes both ways -- I think many people consider GOOG to be overvalued at $300 but would look differently at a company with projected earnings of .75 and sustainable very high earnings growth that they could get for $30. The decimal point makes a big psychological difference to some people.
I think that, senseless though it may be, a split will likely increase the price for Google a little bit at least in the short term (and perhaps increase the likelihood that GOOG will join the S&P 500 -- only Sears Holdings right now in the index has a price even half of Google's), and it will very likely increase the volatility. As someone who aspires to be a very long term holder of Google based on their future capacity for innovation and their focused and successful management, I secretly hope they never split the stock -- I'd love to be holding my Google shares in twenty years and looking at the lovely five digit prices I could get for them. But I'm holding either way. I do not expect to sell Google -- even if we have another stock market meltdown, I'll hold through it and I believe we'd see Google rise from the ashes on the other side (as Ebay did the last time around). The Internet isn't going away.
There are lots of folks weighing in on this -- I like the perspective of the search engine community, check out Search Engine Watch for one good blog with regular updates on the business.
technorati tags: Google, search
This article posted by One Guy @ 7/22/2005 09:35:00 AM 0 comments
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