Temptation Under the Armour

OK, so I have a bit of a tendency to buy popular growth stocks on pullbacks -- if I believe the growth story, my knee jerk reaction is often to pick up a few shares or a few call options when what appears to be a temporary setback brings the share price down.

This is what happened when I doubled my Google holdings at $510 or so when their earnings disappointed slightly. And though I haven't gotten around to writing about it yet, this is the same thing I did with Apple recently when the "sell the news" drop hit AAPL shares when the iPhone price cut freaked everyone out and let me pick up shares in the mid-$130s (perhaps it's for the best that I didn't write about it ... who on earth wants to hear yet another blogger talking about Apple, by far the most popular stock for online discussion? I can't say that I have anything new to add to that debate).

And I'm tempted again -- this time for a stock that I had derided for quite a while even though it's a "local boy makes good story."

This time, it's Under Armour -- founded just down the road from me by University of Maryland grad and mediocre football player Kevin Plank, who has turned out to be an excellent marketer and athletic clothing trendsetter.

I thought Nike would chew them up and spit them out, and that the introduction of the compression clothing and other Under Armour specialties by Reebok, Nike, and others would kill the market for this young upstart. Clearly, I was wrong ... at least so far. They have created a powerful brand in just a couple years, and they are probably causing Nike to panic a little bit with their entree into footwear. Nike was built on the running craze of the 1970s and the basketball golden age (also called the "Michael Jordan" age) of the 1980s and early 1990s. Perhaps Under Armour will be the first company to successfully build an athletic brand with mass appeal that's based on football, the sport with the broadest appeal.

I don't really know if they will succeed, but the latest share dip has me considering a purchase. In the short term, here's my logic:

The shares were downgraded in the middle of last week by an analyst at UBS lowered his rating and price target. But the real thing that caught my attention was this:

They lowered the price target because of weather.

Now, I'm the first one to laugh when any kind of company, especially a retailer, blames the weather for poor results. If Under Armour had released earnings and blamed the lack of a cool September for flagging product sales, I might find any resultant dip to be a buying opportunity, too ... but I would probably find it easier to resist the temptation, because I would lose a fair amount of respect for management.

So essentially my point is this: When an analyst gives a weather-related excuse for a short term possible sales dip, I get very tempted to buy. When a company gives that same excuse, I am more likely to make fun of them. Or at least, to take advantage of selling by investors who believe that one month's sales makes or breaks an investment.

Weather happens every year -- warm weather, cold weather, it all evens out in the end. If Under Armour needs a few cold days to spur sales of some of their garments, I am absolutely certain that those cold days will eventually come. If they come in October instead of September, I can live with that.

I haven't talked at all about the reasons I still am cautious about Under Armour -- man oh man are the shares expensive -- the forward PE, weather or no weather, is still 45, which is pretty big for a company that the analysts think will only grow earnings by about 30% next year. And the share price did fall back by 8% or so on the downgrade, but we're still up near the all time highs for the stock. Analysts have not consistently lowballed the earnings, so you can't say that they always blow out their estimates, either -- they did last time around, but the analysts were prety close in the two quarters before that.

So this is really about faith in a brand, and a vision for long term growth. Under Armour is just about a tenth the size of Nike right now, and growth that stays around 20-30% for a decade is certainly worth more than a 45 PE ... but will that happen?

I don't know ... but, short term, I'm tempted. I'd like to see some more temporary bad news hit the shares a little harder, but I just might buy a bit of this one before too long.

Full disclosure: As of this writing, I do own shares of Google and Apple, but no other companies mentioned here.

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Buying the Google Dip (GOOG)

Well, this is certainly not a contrarian assessment -- the web is achatter with people who are musing about this earnings shortfall as a buying opportunity in Google shares, including most analysts -- but sheep or no, I'm jumping in a little.

I've been a GOogle shareholder for about two and a half years, but I did sell a portion of my holdings about 18 months ago -- taking profits after my one year holding period partly because I was nervous about short term pricing, and partly because Google had become by far my largest holding.

Now, after a little share hiccup, I'm buying back those shares (for more than I sold them for, unfortunately, but for a price that I think is fair). I sold shares right around $400, and bought them back last night at an average price of $508, which brings my average cost basis all the way up to $350.

Thanks to a portfolio that is much larger now, Google is not back to being my top holding, but it is now in the top five again.

Why did I buy?

Well, the short answer is that the earnings were too good not to at this price. I understand that the price run up to $550 was based on some probably irrational momentum enthusaism, but I didn't think $550 was such a crazy share price.

Here's how the numbers compare from the March 2006 earnings release, when I sold a few shares, to today's news:

Sales
March 2006: $1.92 billion
July 2007: $3.87 billion

Earnings:
March 2006: $372 million
July 2007: $925 million

That's right -- sales about doubled, earnings came close to tripling. Even though the margins are not what was hoped for in this latest release due to a hiring binge, that ain't bad long term performance.

Gross margins have been pretty steady over the past year at near 60%, though net margins are weaker. I'll take that over the opposite outcome (better net margins, worse gross margins) because it means Google's problems are cost-related, not that they're losing pricing power due to competition.

And that's really the key: here in the US, at least, there is precious little competition, and no sign that competition is niping at Google's heels despite Microsoft and Ask and Yahoo ALL launching improved services and much better ad systems in the past year or so. Overseas, even in places like China where Google has market share problems so far, there isn't a single market where Google couldn't buy their biggest competitor without breaking a sweat. ... and overall, Google's international growth continues to outpace even the very good US results.

The "law of large numbers" argument, that Google cannot sustain its growth rate, is somewhat compelling ... but it certainly hasn't impacted Google yet in a meaningful way. It's true that earnings growth has slowed somewhat due to investment, but we're still talking about near-60% sales growth and a company that, I believe, is likely to hit an inflection point with their recent achievement of "full" staffing levels that may enable them to increase margins in coming years.

So ... I can't argue with the market pushing GOOG shares down by a few percent today, as seems to be the final result. But the 8-9% hairdcut the shares got overnight and early this morning was a bit overdone, and I'm glad I picked up a few shares.

I like the fact that Google is investing in more people right now, especially because many of them are overseas hires or hires who can help build Google's next generation of services. Google even indicated that a good portion of that 1% earnings miss may have been caused by the one-time $60 million impact of a change in ther HR accounting policies.

But really, I just want to hold Google shares as a significant part of my portfolio, and this dip gave me a timely opportunity to restore that position when I happened to have cash on hand. Google beat analyst predictions for sales growth during a seasonally challenging quarter, and they're investing in the future with more engineers and salespeople. I think we continue to underestimate the long term growth potential here, though Google will likely look expensive on a trailing PE basis for many years. I'll try to ignore the quarter to quarter volatility and keep my eye on the prize: world advertising domination.

disclosure: I do own shares of Google, and am also a Google AdSense publisher.

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Tight Fisted Googlers (GOOG)

I find it remarkable that it was over a year ago when I questioned Google's decision to do a secondary offering to raise $4 billion dollars ... and they still haven't spent that money.

This comes to my attention again because Google has now crossed the line and has so much in cash and short term investments that they risk being regulated as a mutual fund.

Now, I assume that they'll get their exemption or otherwise find a reasonable way around this -- but it begs the question, what are they going to do with our money?

Google now has about $14 billion in cash -- that's more than 10% of their market cap. [Correction -- it's actually $10 billlion as of the end of June, sorry -- see comments] They have excellent profit margins and still more than 100% earning growth, and they're continuing to pile up the cash.

So what are they going to use it for? I think we're many years away from a Google dividend, and it would be foolish to buy back shares at this point since just last year you issued those shares at a much lower price (around $300) -- you'd just be paying investment bankers to waste money for you.

I'd still be happy to see Google make some good acquisitions that fit nicely into their wheelhouse -- Akamai's still under $6 billion, for example, a high traffic publisher like CNET would only set them back a bit over a billion (and CNET is much more nicely priced today than it was when I sold a year ago) or some of the advertising competitors like Valueclick at a billion and a half, or even a more traditional advertising agency -- Interpublic, Omnicom, Publicis or WPP Group are all in a price range where Google could buy them with cash, though Omnicom and WPP would be tight at close to $15 billion.

Do any of those really make sense for Google? I don't know -- they have clearly shown no interest in large acquisitions in the past, with the exception of the AOL investment that I believe was designed more to keep their market share than to proactively build the business. They want to grow with their own technology, and make small acquisitions to build services and capabilities -- but they're hiring as fast as they can and expanding with more server farms around the world ... and they still can't spend their money fast enough.

I don't have the solution, but I hope someone at Google does -- the business is great, but use the tremendous opportunity of this extra pile of cash to grow as aggressively as you can ... one needs only to look up the coast to Redmond, WA to see how easily an insular company with a cash hoard and a reluctance to spend it can become stagnant.

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Earnings Season Thoughts (GOOG, WFR, AKAM, ISRG, VRTX)

This is very likely the biggest single day for me in earnings season -- several of my strongest performing stocks like MEMC Electronic Materials (WFR), Akamai (AKAM), Intuitive Surgical (ISRG), and Vertex Pharmaceuticals (VRTX) are releasing earnings after the close today.

So this seemed an apt time to check up on the earnings releases that I haven't yet mentioned.

Yesterday, Cemex (CX) released their earnings -- and no one was particularly happy with them. The stock split recently, but that didn't have any real impact -- no, the impact was from declining US sales. Cemex had great sales increases in every other major area, including Mexico and Spain, but US sales dipped significantly. I found this very surprising, given the continuing cement shortage in this country, but I expect commercial and infrastructure construction to continue growing over the long term here at home, and with the rest of their markets performing very well right now I'm not terribly worried about a blip in the US. In fact, the news out today that GM was buoyed by its Latin American division gives me a bit of hope that consumption is increasing in that region, and any increase in automobile sales should help push demand for improved road infrastructure. That's a bit of a stretch, but at least it's a stretch on the positive side.

And Google (GOOG), another of my larger positions that has already released earnings, surprised me a little bit as well -- not because they continued to beat estimates handily (beat by more than 12% this time), but because it brought in virtually none of the volatility we've come to expect from GOOG earnings.

Google's now trading at less than a 40PE on current year's earnings (reported and estimated) -- that's about as cheap as it's ever been, though it's certainly not cheap in relation to the rest of the market. I sold about 40% of my Google holdings earlier this year at close to a 100% gain and will be holding these, but I think investors are now so afraid of growth stocks and technology stocks that GOOG is getting attractive again -- over the past two years they have steadily increased earnings, kept their noses clean, innovated with new products that may be monetized eventually, and, most importantly, continued to take market share from all of their competitors around the world.

And Gol Linhas Aereas Inteligentes (GOL), another of my bigger holdings, is managing to maintain very solid margins and increase market share even while they grow their fleet considerably and grow earnings by about 50% -- they're subject to oil prices just like all the other airlines (though Brazilian prices are a lot friendlier than US for jet fuel, in general), but they are growing very quickly without sacrificing profitability. The ADRs have been subject to the strength of the Real, and more significantly the shares have been on a rollercoaster as Varig's restructuring has played out ... but I don't see anything happening to Varig that will hurt GOL significantly, and I think the only thing that will bring trouble to the company is a recession in Brazil that curbs demand for tickets.

Looking forward, we've got AKAM, ISRG, VRTX and WFR all reporting today.

WFR is a company I've written about quite a bit recently -- the collapse of their deal with Motech was disappointing, but the cessation of their supply agreement with Evergreen Solar (ESLR) was an indicator of the upward trend in their market, and the signing of a deal with Suntech Power (STP) today to supply solar silicon wafers for ten years in exchange for an up-front payment and a warrant for STP shares came earlier than expected but is also a strong positive.

And today, WFR will release its earnings after the close -- and they've beaten estimates the last two times out, if not by all that much. Analysts are expecting something in the low-40 cent range for EPS, which would be close to twice their year-ago earnings (a year ago is roughly when the company began turning things around and their shares began climbing). WFR has been much higher than this, at around $48 before the bottom fell out of the market, and is priced at close to a market multiple -- for this kind of growth, that seems a more than fair price to pay.

VRTX should be insignificant -- their earnings don't mean much, because no one is buying this company for their current royalties on a few antiviral drugs that are in production now. No, people are buying Vertex for VX-950, their anti-hepatitis compound that has show remarkable results in early clinical trials. Vertex has made some solid partnership agreements in the last few months and is very well financed to complete these trials, so unless there is news about VX-950 or VX-702 (and I don't believe there will be), I don't think we'll learn much from the earnings release.

AKAM is feeling the pain of growth stocks everywhere -- it has gone up so much that it is hard to consider it cheap even on forward earnings. Add in the fact that now many folks are getting worried about Limewire, which has replaced Bittorrent and Google as Akamai's boogeymen, and I expect that the folks who are sitting on huge returns in this one have itchy trigger fingers. Limewire is actually a real competitor, with a similar business plan to Akamai's, but AKAM is so entrenched with their customers and has such a strong portfolio of clients that I think fearing the upstart is a bit premature right now. Still, any disappointment on earnings release this evening -- any worsening of margins that might bring in the specter of price cutting due to competition, or anything less than a big uptick due to heavy World Cup traffic, could bring another wave of selling. With the demand for faster commercial delivery of audiovisual files continuing to increase dramatically, I still think Akamai is a good place to be in the long run ... even if they get some competition in the space they have owned since they acquired Speedera. But it's not a slam dunk, and the shares aren't cheap right now in my opinion.

Intuitive Surgical has been actually fairly quiet lately. In the last few months it has recovered from the beating it took when they lowballed their first quarter sales numbers (especially since they then beat those lowballed estimates handily), but folks will certainly be watching very closely to see how many of the new Da Vinci S machines they sell, and what kind of penetration they're getting into the prostatectomy field (where they're shooting for 35% of the market by the end of this year) and, perhaps more importantly, into hysterectomies, where they are trying to build a presence in a much larger market. I looked into those with some channel checks in the Spring, but haven't followed up yet in any detail since the last earnings release eased a lot of my concerns. This company has the potential to revolutionize all kinds of surgeries in the years to come, but with hospitals generally hurting I'd be happy to see them just keep up with the sales they had in the first quarter -- in the long run, this will be a cash cow with lucrative instrument sales driving returns as more and more surgeries are performed, but in the short run the shares should bump up and down on the numbers of machines sold.

Should be an interesting day -- the next six hours will go a long way to determining whether or not my portfolio will shortly recover from the beating it has taken in the last two months, but so far I've heard nothing terribly disturbing from the companies I own, and I remain quite optimistic about their long term prospects.

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Valueclick short opportunity? (GOOG, VCLK)

For anyone who doesn't watch Seeking Alpha or any of the better Search Engine blogs regularly, David Jackson at SA today posted a very interesting note about Google's new affiliate network that's entering testing. Some of the search engine blogs that noted this as well are here and here.

In short, Google is testing a new AdSense program that would publish what they're calling "Cost Per Action (CPA)" Ads -- ads where the publisher receives payment only if the clicker does something active that makes the advertiser happy. That could be filling out an email form, subscribing to a newsletter, entering a contest, or buying a product or service. I use Commission Junction now, for example, as part of my affiliation with ADVFN, and am paid a small amount when folks sign up for a free ADVFN account from my site, but the program and network are so miniscule in comparison to Google's advertiser network that you can't really compare them.

David believes this is the death knell for Valueclick, which owns Commission Junction (the largest affiliate marketing company/network, or at least the best known). He noted in his post that he immediately shorted VCLK upon seeing this news from Google, though that doesn't appear to have happened across the board today -- ValueClick is actually up today, partly because they announced a fairly big stock buyback yesterday.

VCLK is a profitable, smallish ($1.5 billion market cap) company that's growing pretty quick and has a fairly high forward PE of 20+ that's reasonable if you think their growth will continue. I'm not much of an expert on this business and don't know anything about ValueClick's other revenue streams, but I would tend to agree with Seeking Alpha's founder that if Google moves aggressively to take ValueClick's business, we'd at least have to assume a significantly lower growth rate for VCLK.

David is shorting VCLK, which is something I don't do (I'm not willing to take on the infinite risk of shorting in case I make a wildly bad bet), but I also do notice that VCLK put options are trading without huge premiums -- may be worth picking up some short or long term puts here if you believe Google will move forward with this and eat into VCLK's business, and doing it today might be wise, before this news gets out of the blogosphere and the search engine watcher world and into the mainstream press where it might get VCLK investors nervous. But you're not allowed to blame me if this blows over, or if Google drops this program after testing and it has no material impact on VCLK.

Thanks to David Jackson and Seeking Alpha for this news -- I read it there before I saw it anywhere else.

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I could have made you rich! (GOOG)

Really, all you need to do is look at my short-term decisions, then use as much margin as they'll give you to bet heavily the other way.

That's halfway a joke, of course. I've done fine over the past few years in beating the market handily thanks partly to some good dumb luck, and I don't usually get filled with regret when I make decisions that the market turns against for a short period of time.

But again, with Google earnings out today ... I could have made you some money.

All you had to do was notice when I sold about 30% of my Google holdings to diversify a couple weeks ago when it was just under $400.

And then, being a good contrarian, you would have made a huge bet on Google.

Today, you'd be up by more than 10% as Google released great, analyst-beating earnings once again.

And really, you'd have to figure the odds were in their favor. Google doesn't seem to care what analysts think, but they have clobbered the analyst estimates every time excepting one, it just so happens that that one was last quarter. And now they've more than made up for it.

As I type this and watch the after hours action, Google is trading at about $440.

This is an interesting experience in investor psychology for me, because I hemmed and hawed about selling part of my GOOG holdings for a long time (it was by far my largest holding) before finally selling a portion a few weeks after I passed the one-year holding period. And I still hold the vast majority of my GOOG holdings that I picked up at an average price of around $195, so this blowout earnings report from Google is really great news for me.

But I'm mostly I'm just mad that I did my diversifying a little too early. I've said this before, but sometimes being wrong is infuriating, even when you're making money.

So as I said, I'm a great contrarian indicator sometimes ... I have full confidence that most of the companies I invest in will go up in the many years that I intend to hold them. But I'm getting almost as confident that they'll drop in the few weeks after I buy them (or shoot up in the weeks after I sell).

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Diversifying -- Google Sale (GOOG)

Though I still love Google the company and I still think the stock (GOOG) is likely to have a good long term future, albeit a volatile one, I've long been concerned about my large overweight position in GOOG and am taking advantage of what seems to me to be a reasonable price today to take a little bit of my position off the table.

I was a little surprised at the level of beating that Google took when they mentioned that their growth might be slowing (duh) ... and I have noted before that I wanted to consider lightening my Google holdings if the shares returned to a reasonable price following my one year holding period for taxes.

So today, I sold roughly 30% of my Google position at $395. I hope not to sell any more.

Anyone who has been using this blog as a contrary indicator can, therefore, expect GOOG to rocket back up to $475 within minutes. That's often how the market reacts to my decisions in the short term, I've found.

I did have several readers ask me why I chose not to sell at the high ... and that's sort of a reasonable question, since back in January I was already getting a bit itchy about my overexposure with Google well above $450. But back then I would have sold with short term capital gains, which I'm very, very wary of doing.

I think we often underestimate the impact of taxes on investing -- I have several retirement accounts, but in my larger regular accounts I always consider the tax impact of what I'm doing. In some cases I'll sell to harvest a tax loss in December if I've been considering selling a company for other reasons but have been patiently waiting to decide (as I did with DWRI last year, a company I was much too patient with).

But when I do have significant gains in a stock I am very leery about selling before the one year holding period. The difference between the long term capital gains rate of 15% and my top marginal income tax rate of roughly 31%, which is what I expect to have to pay on my gains this year (hopefully it will be higher next year) is 16 percentage points -- that is a lot of money, and taken in the abstract a very likely 16% gain would be enough reason to hold a stock for a year.

So If I had sold, say, 10 shares of Google that I bought at $200 (to simplify the math) for $475 in January when Google was universally beloved and analysts were pegging it with $2000 price targets, I'd have $2750 in gains. At a 31% rate the taxes would be $850, giving me an overall return of $1900, or 95%.

If those shares could have been held for a copule months longer and still sold at $475, the return at the lower tax rate of 15% would have been $2338, or 117%.

That is a wide enough margin to prevent me from trying to take profits before a year in most cases, even though in this case I would have done slightly better if I had hit the absolute top of the market with my sale than I did selling some here at $395.

But I wouldn't have done much better, and I would have really had to hit the absolute top of the market for my sale, which I have found virtually impossible to do (saving an occasional bit of luck).

Using the math above, today's sale would have been for a gain of $1950 at $395, and I would pay taxes that reduce my actual gain to $1658 -- a bit worse than the $1900 I would have received for selling those shares at the top of the market and taking the larger tax bite.

If, however, I had missed the absolute top of the market by about 7% -- much more likely than hitting the absolute top, In my experience and opinion -- and instead sold at $440 in January, my after tax gains would have been the same as they were today with a sale at $395.

Close enough, and enough ranting about the importance of short-term capital gains taxes.

This sale is something that's been bouncing around in my head for quite a while -- while I love Google's growth potential, the shares that I bought in the $170s and $180s gained well over 100% in less than a year, which is more than I was expecting and, rationally, probably more than the company deserves. Today, with my average Google position at just about a double and the law of large numbers beginning to drag at the market cap, I'm taking a bit more than half my initial purchase money off the table to reduce my exposure.

This decision is primarily about reducing risk and diversifying.

On the diversification point, Google before this sale made up close to 15% of my individual stock portfolio, and I'd like to keep that down to 10% or below for any stock. One way to do this rebalancing is to simply sell partial positions of big gainers and use that money to invest in stocks that seem undervalued, depressed, or undiscovered in my portfolio ... I've got a few ideas in mind for this money.

And on the risk front, I do occasionally take portions of winning positions off the table in order to reduce my exposure and recover some of my intial investment -- I did so with Vertex and Middleby a little while ago, even though I generally really don't like selling. I am especially inclined to do this with shares that have a margin component in my portfolio, as VRTX, MIDD, and GOOG all do -- reducing risk of loss on borrowed shares is more critical than in the shares held in my cash accounts (I only use margin for about a third of my portfolio).

I do expect Google to be a dominant company in the world for many years to come, but I also have some concerns about competition with a reinvigorated Yahoo, MSN and Ask.com, and about valuation. Google is obviously never going to look cheap, but I do think they're coming to a point with their increasingly large need to invest in new markets, people, and technologies where there are likely to be additional speed bumps along the way.

I have no intention of selling my remaining Google position, which I'm now holding at an average purchase price of about $194. Barring any shenanigans or unexpected problems with the company or management, I'll be holding these shares for many years.

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Google's Just Trying to Help! (GOOG)

OK, now this is one of the sillier wordings I've seen in a press release in a while.

Google (GOOG, as if you didn't know the ticker by heart) announced after the trading day ended today that they're going to be issuing yet another stock offering to raise a couple billion dollars in cash. Certainly not the end of the world, though as I did last time they issued shares I question why Google needs the money today with the amount of cash their business already spits out. They used the regular boilerplate language in the release to say the money will be used for general corporate purposes, possible acquisitions, etc. ... but the fun part was in the beginning of the release, when they wrote:

"This offering will partially meet the anticipated needs of index funds to purchase Google Class A common stock when Google is added to the S&P 500 Index."

Oh, how can we thank you, Google! What were those poor index funds to do before these extra GOOG shares became available -- how bereft they'd be without the easy availability of Google shares for purchase!

Oh, wait ... Google shares are available for purchase, in plenty of quantity, every day. In fact, about three times as many shares as they're now planning to offer change hands on the NASDAQ every single day. Index funds would have had no trouble buying enough shares to meet their index targets ... it's just that they'd have to pay a little more for them because of increased demand and constant supply.

I'm not particularly upset -- it's fine that Google needs money to make acquisitions because they're terrified of Microsoft's massive cash hoard, I just hope they spend wisely as I believe they've done in the past (yes, I even think the AOL deal made good sense for them, and I'm very pleased with their smaller acquisitions like Writely).

But please, don't sell us that line of hooey -- they're trying to time the market by issuing this offering after a nice runup in the shares, so just say so ... Google has clearly had no interest in cozying up to Wall Street since they went public, it's certainly not believable that they're trying to do the index fund managers a lucrative favor today.

At least we get a little comic relief to accompany the 3% drop in share price after hours. In my heart I actually blame the little after hours drop on the fact that I briefly considered paring a small part of my GOOG holdings today and decided instead to hold on, but perhaps I'm overstating my own influence.

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Google Finance Beta

For the eight people who read this blog who haven't already noticed it, Google released their beta version of a finance portal this morning (here's the Click Commerce page). David Jackson at the Internet Stock Blog did a great job of summarizing the features and the sources for Google's data, you can find his writeup here.

Although Yahoo is likely to incorporate some of these features shortly especially the interactive charting with key news release dates noted on the chart, I'm very pleased about the amount of data Google has been able to cram on one page. While there isn't anything here that you couldn't also find elsewhere, they've done a relatively elegant job of combining a lot of the critical things you might look for in a thumbnail sketch of a company -- basic company financials and operating ratios, key personnel, company profile, etc. Yahoo makes you click to several different pages to get an overview of a lot of these items, and while you'd need to dig deeper than this into any company before buying shares it is nice to see a fuller thumbnail available here.

And of course, Google has incorporated blog searching in this, which I hope will be a valuable service as the number of excellent financial bloggers grows, and they're using their own Google groups instead of the much more widely used Yahoo Finance Message Boards. The Yahoo Boards are almost entirely intolerable (and intolerant), so hopefully Google can grow their Groups into a genuine competitor -- I'm willing to give them a try.

Finally, one nice tidbit -- I like that Google has included both PE and forward PE on the brief snapshot at the top, that should help to minimize confusion and let us compare apples to AAPLs.

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Bear Market Blahs -- Where to invest now?

Well, when the market as a whole is taking a tumble like it's doing this week, and my portfolio is almost entirely awash in red, it's hard to get motivated to think about your holdings.

Some are still doing quite well ... PDL Biopharma (PDLI -- click to register for free RT streaming quote)got a fair amount of attention around the time of its earnings release last week -- they would have had their first quarter of positive earnings if not for some one time charges, and forecasts are for real-life earnings in 2006 that will give PDLI a PE ratio for the first time. Always exciting for a biotech. Business Week recently came out with a PDLI article and they make a few good points -- principally that PDLI, though risky, should generally be considered less risky than many similar early-stage biotechs.

And Northern Orion (NTO) continues to steam ahead, enjoying the wonderful tailwind of low-cost mining production and very high copper and gold prices. That one will ebb and flow with the commodity pricing over the next several years until Agua Rica is online -- though some folks think they'll be bought out before then so a bigger company can get their hooks into Agua Rica. Either way's fine with me, this is my only real metals investment and it seems to be doing just fine.

But nearly all of my holdings are tanking this week. Tough news on interest rates is rough on the market as a whole, and especially on the more volatile sectors that I am fairly heavily weighted in like emerging markets, growth stocks and the like. Some of these companies I find tempting for additional investment during this general decline ... GOL is down about 6% today, a rough give-back of most of their recent gains ... ISRG has had a horrible month and is now extremely tempting for another add-on purchase. But I've already committed so much to these two stocks that I'm wary to double down again just yet.

On the flip side, this is the worst time to offload most of my holdings (though I may soon sell Overstock, for reasons I've covered recently, and if I wasn't overly patient I would have already lightened up on my Google position a little -- too bad I didn't foresee their ridiculous problems of the last few weeks). When the market's taking a dip like this, seems to me that it's time to look for new investments that might be going on sale. Here are a couple that I'm thinking of at the moment:

Options Express (OXPS). I've had my eye on this one for a little while as it has had an almost unmitigated upward trajectory. I like a lot of things about the company. I think they're in a great business as options trading is climbing dramatically worldwide, and should climb faster if the market becomes more volatile in the coming year as many people expect. They have a fairly distinguished product that is substantially different from what the major online brokerages can offer for options trading. Though a fairly young company, they are very profitable even though they trade at a current high PE. And they have huge insider ownership, which I always like to see. Insiders have sold a lot of shares recently which is not terribly surprising since they've just completed their first year as a public company, but that's certainly an area of concern to investigate. They also pay a small dividend, which is a nice treat.

Oh, and did I mention that they're getting clobbered today? Down close to 10% as I write this after announcing what I can only imagine are weaker performance numbers than expected. I see that their performance is still up dramatically YOY but down from last month, which might be the reason for the current panic -- I am interested in picking up shares but need to do some more research first. If the price keeps plummeting the dividend yield will be up to 1% in a few minutes.

Markel Corp. (MKL). Markel is a big insurance underwriter, and a lot of folks think of them as a junior Berkshire Hathaway (not unlike White Mountains). Like Berkshire (and Google and others) they haven't split the shares so the stock price is up north of $330 at the moment. And this week, Markel is one of the few companies I'm watching that isn't dropping like a stone.

Markel had a tough 2005 business-wise, as did all the big insurers with hurricane exposure. It now seems like it might be a reasonable time to re-purchase a MKL position for my portfolio given the firming prices for P&C insurance and Markel's excellent investment performance. I owned MKL for a while, selling back in 2004 at a small loss when they weren't doing very well, but they're looking appealing again. Like BRK, they have a large cash hoard (though much smaller than Warren's, of course) and have some solid float performance that gives them free money with which to invest. This would be a nice counterpoint to much of my portolio, given that MKL focuses on value investing in equities with their float. Haven't done much research ye to reacquaint myself with MKL after a year or two of absence, but I've got their latest filings and conference call transcripts to pore through and I'll see if I like what they're doing. 2006 is expected by analysts to be a very solid year for MKL, giving them a forward estimated PE of about 12 ... if I can have faith in those numbers, I think now is a good time to pick up some MKL holdings that I can stash in a retirement account and hopefully ignore for a good many years.

Will let you know if I take any action on these or other ideas that are mulling around in the back of my head.

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Him with his Google in his Mouth

Boy, one thing you can say for Google (GOOG -- click to register for free RT streaming quote) -- they definitely don't know how to do guidance.

This has been the worst overall day I've had in the market in quite some time -- the portfolio was down by about 2.5% today, thanks in large part to Google but also due to a pretty wide selloff in many of my holdings. Shanda I'll have to write about when I've had more time to review the release and the conference call, but that was a pretty ugly fall, too. PDL Biopharma released more good earnings but no huge news, which is what we ought to have expected, and their shares are doing just fine today. Marvel is performing very well, too, so maybe folks are coming around to my assessment that it's time to look at 2007.

But most everything else had an awful day. Google really has a headlock on market sentiment, it seems, and the bad consumer confidence numbers and rebounding economic growth seem to have everyone totally confused and, for the most part today, heading for the exits.

I'm a little shocked, frankly, that Google sold off as much as it did following the CFO's comments about the growth rate declining, and about the need for Google to tap new markets -- there wasn't any surprise in there, though I suppose hearing anything out of such a tight-lipped company impacts the market.

Of course, their growth will slow down -- that falls into the "duh" category. It's already slowing down, they've bumped down from 100%+ growth to 80% to whatever it is now, I think something between 40-50%. I still love the company and have no idea whether the shares are really worth $300 or $500 right now, but I know they will continue to grow their business even though the growth rate will decelerate.

And of course, they need to expand into new markets. A look at Google Labs, or the Google Pack, or Google Video or the new Google payment system will tell you what any investor should want to hear: They're trying out a lot of new things, and they're letting their huge brain trust of engineering talent throw new ideas at the wall to see what sticks. I'm fairly confident that some of these services and ideas will bear fruit, and that Google will be able to monetize some of the great things they do outside of search and advertising ... eventually. And don't forget -- new markets doesn't just mean "not search advertising" ... it also means, the rest of the world. The Internet is not yet everywhere, and neither is Google.

And perhaps I'm swimming against the tide, but I'd prefer they maintain their Wall Street silence instead of trying to sneak out the partial guidance trial balloons they've been doing since their last earnings release. I liked them a lot better when they were thumbing off Wall Street.

My advice to the Googlers, not that they're listening: Don't worry about making life any easier for the analysts, just do your job, follow through on your commitment to do right by long term shareholders, and grow the business.

And my reminder to myself: Stay diversified.

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Fear overtakes greed for Google (GOOG)

It has been a difficult week for our friends Sergey and Larry. Google (GOOG -- click to register for free RT streaming quote) has been taking shots all week and the market now seems to have replaced full-throated optimistic jubilation with soul-deadening pessimism, in relatively short order.

James Stewart, the SmartMoney columnist, wrote last week that he sees Google's depressed share price as very nearly a buying opportunity. After this morning's decline, which is owed almost entirely I think to the current Barron's and Wall Street Journal articles, I'm getting inclined to agree.

Barron's wrote this weekend that the shoals awaiting the good ship Google are becoming more perilous, and that their ability to match performance with expectations is getting more questionable. That's certainly a real possibility, especially for a company growing at this pace that does not provide guidance. They also took Google to task, as did the WSJ this morning, for having some of their quarterly growth come from interest income (following the cash infusion of their huge secondary offering), and having such a high margin business that any fluctuation to the top line moves the bottom line dramatically. The long Barron's article is freely available here if you want to read their whole argument.

I don't think Barron's is pointing out much that is not widely known already -- click fraud, the rule of large numbers, competition, and many other elements could come into play to create a perfect storm that brings Google down to $100.

But that doesn't mean it's likely. We all, as investors in individual stocks, play a game of probabilities -- what are the odds that this company will fail, or succeed ... what are the odds that their products will gain favor, or face scorn? Have the Wall Street bookies taken too much money on one side or the other and tilted the spread too far?

In my opinion, we are all understating the potential growth not only for internet search, but for targeted advertising. While Google's model has many imitators, it has no competitors in online advertising who show any sign of building a better mousetrap at this point. And while Google's competitors try to catch up, Google is expanding their search and targeting capabilities -- video, radio, television, magazines. I think the odds are in favor of Google continuing to keep an edge over their competitors, not least because they are expanding their staff so dramatically and continuing to bring the world's best engineers and programmers into their culture of innovation.

As someone who used to work in direct marketing before my current academic career, I am fully aware that targeting is much more than half the battle in advertising -- the ability to place the right content in front of the right person at the right time is the killer app for marketing. I hope and fully expect that Google's killer app -- which is still really in ints infancy, in my opinion -- will continue to fund a massive Research and Development effort that will in the future make our best prognostications seem foolish in five or ten years.

Of course, "buying opportunity" is not the same as "I put my money on the line". I still own all the Google shares that I bought with an average cost basis just below $200 ... but I haven't bought any more on this decline, and I don't intend to.

Regular readers of my blog and my postings over at ADVFN (register here for free to see those) would note that I've been talking more lately about my caution regarding Google, and about my interest in paring back my outsize GOOG holdings. I still am generally interested in reducing my Google shares to help my portfolio remain well diversified, but I'm not willing to sell them at this price (and I wasn't willing to sell them while I would owe short term capital gains on them).

In general, I'm reluctant to sell stocks that are performing very well or to pay commissions and taxes on gains by trading in and out of stocks to time market movements (even if I could time the market reliably, which I can't) -- unless I can't understand why they're performing and I no longer believe that they have good long term prospects, or unless I see a catalyst in the near future for their decline that hasn't been priced into the stock (for example, a competitor that's growing faster than expected, or a drug nearing the end of it's patent protection).

During my years of investing I have made many mistakes in all kinds of areas, but the most galling mistakes have been in selling too early -- the times when I failed to sell early enough and had to sit through a decline and eventually sold out have been dramatically outnumbered by the times when I sold before several-hundred-percent gains. Patience can hurt, as it has this week with Google -- but in my experience if you're invested in the right companies and understand their business, it's the most renumerative approach.

Google is an amazing company that the Street is having a terrible time attaching a value to. I'm having a hard time too, but the recent decline seems to me to be an overreaction. We'll see.

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Google gives a surprise (GOOG)

After hearing so much about how Google's valuation was insane, about how they couldn't keep up this growth, about how the prick of a pin would burst the bubble, I'm a little shocked that it's only down about 10% today after falling short not only of average estimates but also, one would assume, of the expected "whisper numbers" that can be so important for a very volatile growth stock.

I think it's largely due to the fact that the business is doing fine -- from the call and from the earnings releases it's easy to get a sense that they are investing more than expected and paying higher taxes, but also seeing continuing high growth and continuing to take market share from competitors. For future growth, the controversial decision to cooperate with the Chinese government should also be a huge benefit -- Chinese searchers can still use the US-based servers if they want slow, interrupted searching, but they will now also be able to use a local server network for Google's fast, albeit censored, search. That puts them on the same footing as Baidu and the other locals as well as Yahoo and MSN in China, which I think is necessary if ethically unfortunate.

In the long run, meaning after a few more years in my estimation, I expect it to be fully impossible for China to censor the way they are doing today -- the innovation money and brainpower around the world is focused on sharing information, not on restricting it, and the gates will never be as powerful as the invaders. China's censorship will likely be as pointless in the long run as the great wall -- a powerful symbol, but not one whose construction can keep up with the competition.

I'll be interested to see how the GOOG share price reacts over the next few weeks, since I'm still considering selling a small portion, but I think the market has reacted in a surprisingly mature and measured fashion -- a bit of a dip makes sense given the growth expectations that were built into the shares, but I would have guessed this would crater more significantly on the surprising news ... thankfully, it appears the cratering was restricted to the after-hours cowboys.

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Great Googaly Moogaly (GOOG)

OK, so I was mostly not paying attention to the market last week. That means on occasion I caught a few tickers while driving around and watching the XM display, and once or twice got a look at my portfolio, but didn't really read anything of any substance.

And Google (GOOG -- click to register for free RT streaming quote)is now, by a significant amount, the largest single stock holding in my portfolio.

So you can understand how I was a little trepidatious as I saw a flicker of difficult days flicker by in the corner of my eye -- down $20 on Monday. Down another $50 on Thursday and Friday. What the heck?

I was beating myself up a bit about this over the weekend when I had a little more time. See, I have been considering for a while whether or not to lighten up my GOOG holdings by a little bit -- maybe sell off 25% or so just to ease my mind. But I wanted to wait to have this argument in my head until after I hit the one year holding mark, since the shares I would sell are in a taxable account.

But man, looking at that $399 price on Friday made me smack myself and think that I should have sold at $470 when I had the chance.

Of course, no one ever hits the highs when they want to sell. But I certainly could have sold some at $450 or 460 -- nice round numbers that seemed a little crazy.

But instead, I held fast and didn't even think too much about it -- wait for a year, I thought, wait for the lower tax bite. Come Saturday I agonized ... I told myself, that waiting just cost you $70 a share!

Of course, now I feel much better ... GOOG has recovered quite nicely today, taking back half or so of Friday's disastrous 8% drop.

But in reality, those taxes mean more than you think. As many investors do, I really didn't think about how much of a difference taxes make. The difference between a top 35% (or whatever it is precisely) tax rate and the low one year rate of 15% would be in itself enough of a return to make for two quite nice years of investing.

So if I had sold at $470 and bought at 200, to make the math easy, I would have had a 270 profit. 35% of that is (calculator, please...) about $95. So my actual profit would have been $175 a share. Not as nice.

Even if the stock stays on the low side and I sell at 400 in March at the lower 15% rate, I still would come close to doing as well as if I had sold at the very top two months earlier. At $400 I would have a $200 profit, taxed at 15% that's $170.

Close enough to make it worth holding, in my book, so now I don't feel as anxious about "missing the top". After seeing the FARO fiasco and having to sell today, it's nice to remind myself that patience is almost always an investing virtue.

And hey, shades of 1999 -- I heard on the radio today that some analyst set a "long term" price target on Google of $2,000. Haven't seen anything on that in print, but it makes for a nice daydream ...

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Annual Checkup -- GOOG

Google (GOOG -- free RT quote), a little internet company that you might have heard of, has grown so fast this year that it now dominates my portfolio. After returns of about 120% to this point it now makes up close to 15% of my individual stock holdings. So, is it time to lighten up? Recent news included the AOL deal, which I liked, and some upgrades -- Piper gave GOOG a $600 price target yesterday, and Bear Stearns a $550 target today. If Piper is right, Google will be a $175 Billion company at this time next year -- and while that's hard to imagine, it was probably harder to imagine that it would hit $100 Billion within a year of going public. I have to keep reminding myself that I thought I might be overpaying at $180 or so when I first started opening my Google position -- after all, it had already doubled in six months. I have recently been resisting the temptation to shave a little bit off of my Google holdings since I think the company still has a brilliant future ... but if this accelerating stock price continues I'll have to reconsider whether any future can be as brilliant as the valuation would portend. Not too nervous today, since the forward PE is only about 50 and that, crazy as it seems, is reasonable for their market position and growth rate, but at some point the growth will plateau -- whether that's next year or in ten years is very hard to guess right now, at least for me. I think I'll take the opportunity of hitting the one-year holding period in February and March to consider lightening up, but I don't see a reason to pay short term taxes on this gain right now, and am willing to take the chance that their next quarter might disappoint -- long odds on that if you consider their history. But while I love the company, I definitely couldn't stomach adding any more at this point -- I'm too afraid of gravity. What this means for the psychology of this individual investor will have to wait for another day, but it's certainly interesting to me that I was willing to buy ISRG after it had tripled in a year but wouldn't do the same for GOOG. Hmmm.

Oh, and P.S.: GOOG is again at a 52 week high this morning. Remember when $450 seemed like a crazy price target, oh, about three months ago?

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AOL smartens up? (GOOG)

If preliminary reports are to be believed this afternoon (and investors seem excited about them -- GOOG is hitting a new all time high again today), Google (GOOG -- free real time quote from ADVFN) and Time Warner have settled on a deal whereby Google purchases 5% of AOL and AOL stays in the Google AdSense network.

This is not quite as dramatic as what some folks were expecting, with a more significant stake being taken by one of the big guys in AOL.

And more importantly, this really gives Google a chance to make Microsoft look bad.

Now, I don't think this deal, if it has indeed happens, is going to change things materially for Google. AOL does make up something over 10% of their ad revenues, but they have to share probably 80% of that income with AOL anyway. Some analysts speculate that AOL contributes 2-3% to Google's net revenues, which seems reasonable.

And one billion dollars seems, likewise, a fairly reasonable price for Google to pay to maintain access to this large number of internet users and, more importantly, keep Yahoo or Microsoft or someone else from using that big AOL user base to jump-start an AdSense competitor. Plus, it gives Google something to do with their money, and it is an investment that might work out well on it's own -- after all, $20 billion is reportedly the kind of valuation that Time Warner considered they could get for AOL as a separate entity, and there's some possibility that if they do indeed get forced by Carl Icahn to spin off AOL entirely Google's 5% stake could appreciate.

And my back-of-the envelope calculations say that AOL's ad network brings in roughly $500 million for Google, of which probably $100 million is GOOG's (net of the AOL share). That means would pay roughly 10X TTM net revenue to keep those sales in it's network. GOOG right now is trading for well over 20X TTM sales (though that's not net, and obviously this isn't taking into account the ownership issues -- just the cost of keeping that sales revenue).

So my first impression is that it might not be a bargain, but it seems perfectly reasonable, especially if GOOG can, in partnership with Time Warner, breathe some new life into the AOL site network or somehow rejuvenate the access/subscriber side.

But this isn't just a snub to the less impressive ad networks of MSN or Yahoo/Overture -- this is a smart decision by Time Warner.

After all, Google remains by far the most significant online adversiting network, and while the network effect isn't as important for Google as it is for Ebay, it's still significant.

What do I mean by that?

Well, Google has the biggest and, so far, the most effective contextual ad network. It's also by far the easiest network for outside publishers, especially small ones, to join (believe me -- I'm one of those outside publishers and I've looked at the other networks).

That means that Google gets the biggest network of publishers to host its ads even as their own sites and search results bring in more and more users -- meaning that Google is addressing the largest market possible.

And having the largest addressable market means that advertisers are compelled to go with Google.

And as more advertisers go with Google, other outside publishers want to get in the Google network because more advertisers bidding for space means higher ad rates.

Which means that the network gets bigger and looks more attractive for advertisers ...

... and so on.

So AOL could strike a blow for the little guy and try to help build up a Google competitor like MSN or Yahoo.

Or it could stick with Google, and make more money.

Have I mentioned that I love being a Google owner?

I've written about Google a few times before, most recently here and here, and while I haven't bought any since around $240 I see no reason to sell anytime soon -- though that may change as Google begins to make up a larger and larger portion of my portfolio.

It's anyone's guess right now as to whether or not this will go through, but if it does I think it's relatively good news for both Time Warner shareholders and Google -- though the upside for Google is more limited than the downside might have been if AOL had moved to a competitor and been the catalyst for growing one of the competing ad networks. Even then, it's hard to see Google ever being overtaken in this arena, but we'll see -- everyone makes big mistakes eventually.

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Google Fever

OK, so I suppose it's time to post on Google again, now that they have returned to the good 'ol tradition of clobbering analyst's estimates and risen to yet a new nosebleed level.

I bought my position in Google over the winter and spring and am now holding with an average price of just under $200. I have an outsize position in GOOG (get free real time quote from ADVFN), so I'm not interested in adding any more at this point -- but I wouldn't argue with those who say that it's reasonable to buy even at today's levels above $340.

The problem, of course, is that it's impossible to gauge not only Google's growth rate, but their potential for new innovations and the growth of their market. Google is not only growing very fast in it's core search market, but even as that market itself grows it is continuing to take market share from Yahoo and the other smaller players. How can you reasonably expect to be able to project Google's growth? Will it continue to be 700% year over year? Probably not, but I certainly expect them to be able to grow earnings dramatically enough to justify their PE of 100 or so.

My thesis for holding Google as a core holding going forward remains the same as when I wrote them up after their last ("disappointing") earnings release: they are dominating their industry of internet advertising and search, which leads through the network effect to yet more success, and their founders and management are continuing to push for the development of new ideas -- not only through the hiring of thousands of new engineers and programmers this year alone, but through the development of a true culture of innovation that might make Google Labs this generation's Xerox PARC (though hopefully Google will take more corporate advantage of that innovation than Xerox did).

I would be a little bit surprised if they used their cash hoard to pick up a minority stake in AOL as it is widely expected they're considering, since that is very atypical of their acquisition philosophy until this point -- but I can see how it might make good short-term sense to protect a significant part of their market. I don't plan to buy or sell based on any AOL news.

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Strange Secondaries part 1 -- GOOG

Google and Harris and Harris are both fairly large holdings for me, though Google is much bigger and is currently neck and neck with Berkshire Hathaway for the title of my largest individual stock holding. Lots of chatter today about the Google and Harris and Harris secondaries, so I thought I'd post my thoughts, too. First, Google.

The Google secondary, I dont' get at all. The Googlers have done a great job this year, earnings growth is spectacular and free cash is coming in a gusher. They have no debt, and they have always indicated that they aren't interested in major acquisitions (though I assume they'll continue to make small acquisitions with some frequency, a la Picasa, Keyhole and Urchin).

So that begs the question, what do they need $4 Billion for?

One has to assume it's for investing in growth, but it's a little disheartening to see this dilution without a plan that's released to the shareholders. There has been a lot of insider selling as we celebrate the one year anniversary of GOOG going public, but that doesn't bother me at all -- these people toiled for years for the promise of riches, it's fine for them to diversify their investments and cash out some of their holdings when they can.

I hope that they need the money for something good, and I guess I have to trust management to have a plan. I generally like that they are closed-mouthed with the analysts on earnings projections, etc., but I do wish actual news about operations and management plans was a bit more forthcoming. I expect that this money is for more significant expansion overseas, most likely especially in Asia where they have some catching up to do to make it to the top of the search engine heap. I applaud that initiative if that is indeed their aim.

Whatever else I've said, this relatively minor dilution is not enough of a worry for me to sell, and if the share price falls much further than this dilution should mandate I might again be a buyer. My last buy was at $240, and my fuller, somewhat dated writeup on Google can be found here.

technorati tags: Google, GOOG, search

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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:

• 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.

And internet advertising growth is remarkable -- fueled both by the increasing popularity and effectiveness of the ads and by the growth of internet and broadband users, interactive internet advertising reached $2.8 billion in the first quarter of this year according to the Internet Advertising Bureau, the highest amount yet in a series of nine consecutive quarters of growth since the market crash. E-commerce is here to stay and those online vendors need to advertise (Ebay is one of Google's biggest customers, if not the biggest), but Google and Yahoo and the other advertising networks no longer need to rely on pets.com for advertising as

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

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