GOOGL - Google

[jawn619]

http://www.bidnessetc.com/30730-a-look-at-google-incs-goog-insider-selling/

 

insider selling

[Picasso]

Insider selling is nothing new.

[siddharth18]

http://www.bidnessetc.com/30730-a-look-at-google-incs-goog-insider-selling/

 

insider selling

 

lol it says about Larry Page: "The executive currently has no direct stake in the company."

[siddharth18]

I was just reading this: http://basehitinvesting.com/thinking-differently-the-most-important-contrarian-behavior/ and I saw how Buffett saw past the shallow valuation metrics and though about the business metrics. Things like:

 

 

-Volume of syrup shipped

-Daily per capita consumption of bottled beverages

-Price per eight ounce serving

 

 

And I think it's VERY relevant to how I think about Google today.

 

 

The average analyst is fixated on the next quarter or the next year or the next few years. What about the next 5-10 years though?

 

Google is monster in terms of current revenue, current profit, market cap, etc - everyone knows this. But what's even more monstrous is the profit potential of the value of the toll bridge in next 3+ years.

 

Going beyond the typical metrics (P/E, FCF yield, EV/EBIT, EV/EBITDA), what happens when you think about the business metrics?

 

Metrics like eCPM, cost per click and cost per impression. As more and more commerce of the entire world shifts online, advertisers' ability to monetize the traffic (that flows through Google's toll booth) will increase in value. And in turn, they will compete over each other and will all pay a higher price to Google.

 

Let's pick car insurance niche here:

 

Each click for an ad for the keyword "car insurance" on Google.com costs $30+ in USA. Why is that? Because, in aggregate (on average) each visitor that searches for "car insurance" on Google.com and then proceeds to click on one of the ad is worth AT LEAST $30 for the insurance companies.

 

Compare that to cost of the same keyword "car insurance" on Google.co.in, which costs around INR 8 (US$0.13). Now, since most car agencies in India don't have online portals, and since the # of cars per capita isn't as high in Asian countries as it's in USA, and since most Indians aren't used to buying car insurance online, the $0.13 cost per click reflects the prevailing situation. But as you look forward in the next 5-10-15 years, won't all the (aforementioned factors) provide a MASSIVE tailwind to the cost per click on Google.co.in?

 

Won't more cars come on the road? Won't more agencies come online? Won't more users (as a % of population) transact online ? And won't all of this cause more users to search for car insurance on Google, rather than call their local insurance agent? Wouldn't higher traffic lead to more advertisers advertising on Google and this in turn lead to a higher cost per click? Will the cost per click for ads on "car insurance" in India be higher than today's 13 cents? I think it'll be much, much higher and will far surpass the rate of inflation.

 

Regarding the brand replacement value - It'd take so much talent and so many dollars to replicate (and render obsolete) what Google has created. Just ask Microsoft - they have lost over $10 billion dollars on Bing and it's still stuck in the minor league.

 

Search engine business has two sides to it - getting the most relevant information in front of the user, AND the ability/capacity to fight and weed out SPAM/JUNK. There's an entire industry around gaming rankings on Google (both white-hat and black-hat) and if you follow the trend, you'll notice, it's been getting harder and harder over the years to pull the wool over Google's eyes in terms of ranking high for a valuable keyword. This, IMO, is what separates Google from the wanna-be search engines (Bing and Yahoo). It's not just the simple and clean UI that users appreciate, but Google's reputation as a fair (and extremely strict) arbiter of search engine rankings.

 

I always chuckle when people compare Google to other companies in the space like Apple, facebook, Yahoo, AOL. None of those businesses compete anywhere near Google's core business. Sure Yahoo has a search engine and sure facebook might steal their display ad market share, but Google is the gold standard in search.

 

It's just that Google has stuck its tentacles so far, and so deep into the search business that no other competitor comes remotely close. And it just so happens that e-commerce is experiencing massive tailwinds and this is a pureplay on ecommerce. And the way the search business works, once you hit a certain scale, profits stop adding up, and start multiplying.

 

 

-------------

 

I would appreciate if anyone can point a flaw in my analysis or present a "variant view."

 

Cheers.

[Hawks]

My gut tells me you are right. So much for statistical analysis. lol  Having said that, the cash flow is outstanding. And there was a downgrade today???? Thank you.

[ccplz]

Is advertising on Google actually effective? Who actually clicks on their ads?

 

I know I for one have never clicked on an ad on Google, whilst I have on Facebook. I've always been baffled by how companies are willing to pay so much for something that has never proven to be effective...

 

Good post btw Siddharth. Agree with your basic thesis.

[innerscorecard]

I was just reading this: http://basehitinvesting.com/thinking-differently-the-most-important-contrarian-behavior/ and I saw how Buffett saw past the shallow valuation metrics and though about the business metrics. Things like:

 

 

-Volume of syrup shipped

-Daily per capita consumption of bottled beverages

-Price per eight ounce serving

 

 

And I think it's VERY relevant to how I think about Google today.

 

 

The average analyst is fixated on the next quarter or the next year or the next few years. What about the next 5-10 years though?

 

Google is monster in terms of current revenue, current profit, market cap, etc - everyone knows this. But what's even more monstrous is the profit potential of the value of the toll bridge in next 3+ years.

 

Going beyond the typical metrics (P/E, FCF yield, EV/EBIT, EV/EBITDA), what happens when you think about the business metrics?

 

Metrics like eCPM, cost per click and cost per impression. As more and more commerce of the entire world shifts online, advertisers' ability to monetize the traffic (that flows through Google's toll booth) will increase in value. And in turn, they will compete over each other and will all pay a higher price to Google.

 

Let's pick car insurance niche here:

 

Each click for an ad for the keyword "car insurance" on Google.com costs $30+ in USA. Why is that? Because, in aggregate (on average) each visitor that searches for "car insurance" on Google.com and then proceeds to click on one of the ad is worth AT LEAST $30 for the insurance companies.

 

Compare that to cost of the same keyword "car insurance" on Google.co.in, which costs around INR 8 (US$0.13). Now, since most car agencies in India don't have online portals, and since the # of cars per capita isn't as high in Asian countries as it's in USA, and since most Indians aren't used to buying car insurance online, the $0.13 cost per click reflects the prevailing situation. But as you look forward in the next 5-10-15 years, won't all the (aforementioned factors) provide a MASSIVE tailwind to the cost per click on Google.co.in?

 

Won't more cars come on the road? Won't more agencies come online? Won't more users (as a % of population) transact online ? And won't all of this cause more users to search for car insurance on Google, rather than call their local insurance agent? Wouldn't higher traffic lead to more advertisers advertising on Google and this in turn lead to a higher cost per click? Will the cost per click for ads on "car insurance" in India be higher than today's 13 cents? I think it'll be much, much higher and will far surpass the rate of inflation.

 

Regarding the brand replacement value - It'd take so much talent and so many dollars to replicate (and render obsolete) what Google has created. Just ask Microsoft - they have lost over $10 billion dollars on Bing and it's still stuck in the minor league.

 

Search engine business has two sides to it - getting the most relevant information in front of the user, AND the ability/capacity to fight and weed out SPAM/JUNK. There's an entire industry around gaming rankings on Google (both white-hat and black-hat) and if you follow the trend, you'll notice, it's been getting harder and harder over the years to pull the wool over Google's eyes in terms of ranking high for a valuable keyword. This, IMO, is what separates Google from the wanna-be search engines (Bing and Yahoo). It's not just the simple and clean UI that users appreciate, but Google's reputation as a fair (and extremely strict) arbiter of search engine rankings.

 

I always chuckle when people compare Google to other companies in the space like Apple, facebook, Yahoo, AOL. None of those businesses compete anywhere near Google's core business. Sure Yahoo has a search engine and sure facebook might steal their display ad market share, but Google is the gold standard in search.

 

It's just that Google has stuck its tentacles so far, and so deep into the search business that no other competitor comes remotely close. And it just so happens that e-commerce is experiencing massive tailwinds and this is a pureplay on ecommerce. And the way the search business works, once you hit a certain scale, profits stop adding up, and start multiplying.

 

 

-------------

 

I would appreciate if anyone can point a flaw in my analysis or present a "variant view."

 

Cheers.

 

I agree that Google is cheap and dominant. The problem is that Google's form of search may not necessarily be as dominant a form of discovery as it was in the past. I'm not saying that this means Google isn't a good investment. I'm just saying that focusing on search metrics really isn't taking in the whole picture.

[saltybit]

Given that the iPhone has grabbed marketshare back, I wonder if they are underestimating this number?

 

http://news.investors.com/121114-730087-google-could-lose-big-if-it-loses-apple-safari.htm

 

Google (NASDAQ:GOOGL) has potentially $9.4 billion in gross revenue at risk if it's unable to renew a contract with Apple for mobile Safari toolbar searches, says a Citigroup report, which says potential losses depend on how many Apple customers stick with Google's search engine.

 

Google stock had fallen 3.5% as of Wednesday's close since the Information reported on Nov. 24 that Google's default search agreement with Apple might be in peril. Google stock, though, was up a small fraction in early trading Thursday.

 

That report said the Apple-Google deal is set to expire in 2015, possibly as soon as January. Apple's iPhone 6 sales have been stronger than projected, increasing the potential impact.

 

Citigroup analyst Mark May estimates that 60% of Google's 2014 mobile search revenue will come from its default search deal with Apple (NASDAQ:AAPL).

[rpadebet]

Someone pls correct me if i am missing something. So the reasons for the recent selloff in Google are:

1. Aapl might not renew their contract in 2015.

2. FB providing better targeted display ads

3. New mobile paradigm means, search is through apps such as amazon rather than the browser.

 

That's it or anything else?

 

 

[innerscorecard]

Someone pls correct me if i am missing something. So the reasons for the recent selloff in Google are:

1. Aapl might not renew their contract in 2015.

2. FB providing better targeted display ads

3. New mobile paradigm means, search is through apps such as amazon rather than the browser.

 

That's it or anything else?

 

It looks like the perception is that Google is maturing in its business life cycle. I expect talk about a better capital allocation policy to come up eventually.

[karthikpm]

Siddarth18,

 

Plenty of criticism and skepticism about Google's continued dominance in the search industry especially in mobile.

 

 

http://www.businessinsider.com/google-is-going-through-a-rough-transition-and-there-is-some-pessimism-inside-the-company-2014-12?utm_content=buffer28fa7&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

 

Disclosure : I am long Google.

[snailslug]

Someone pls correct me if i am missing something. So the reasons for the recent selloff in Google are:

1. Aapl might not renew their contract in 2015.

2. FB providing better targeted display ads

3. New mobile paradigm means, search is through apps such as amazon rather than the browser.

 

That's it or anything else?

 

Also, stronger US dollar as ~58% (and growing) of rev is intl.

[siddharth18]

Siddarth18,

 

Plenty of criticism and skepticism about Google's continued dominance in the search industry especially in mobile.

 

 

http://www.businessinsider.com/google-is-going-through-a-rough-transition-and-there-is-some-pessimism-inside-the-company-2014-12?utm_content=buffer28fa7&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

 

Disclosure : I am long Google.

 

It seems like there will always be disruptions and changes; after all tech is the most innovative/disruptive/dynamic sector. The current fears are overblown IMO (especially taken from BusinessInsider - which is the epicenter of hype and drama) and the media is just sheepishly following the hammer-wielding analyst's latest recommendations.

 

My point is that Google's dominance keeps on increasing each day, and the utility of search won't be replaced by either Amazon or Facebook or Apple or Microsoft.

 

As for AAPL not renewing their contract in 2015...let's not forget the % of revenue we are talking about. Total gross revenue was around $1.3 billion, of which Google's share of revenue was $335 million. Compare that to the total of $60 billion in revenues and $14.5 billion of pretax income.

 

-----

 

Look at the Google's market share per country here -  and then ask yourself why does 90%+ of the country keep using Google day after day? In countries countries where Google isn't dominant, it turns out that there are companies out of those countries that arguably provide a better experience. Search engines like Naver which dominates Korea, is based in Korea. Baidu, which dominates China, is based in China.

 

 

The core of the Google's search business benefits massively from economics of scale. The bigger you are - the more engineers you can hire, the more you can spend in R&D, the more customers you can provide to your advertisers.

 

 

Google's display business (DoubleClick, Google Content Network & Youtube) all benefit massively from network effects. The more websites that join your banner/display ad network, the bigger your network becomes. The bigger it becomes, the more advertisers it attracts. And the more advertisers it attracts, the more competitive (higher) the ad rates become, hence making it even more attractive for the remaining websites to join your network. Same goes for Youtube.

[Palantir]

Point is, while G can dominate search, search itself might become less valuable. For example, AMZN has a better understanding of what you're spending your money on and can direct ads better, Facebook has a better idea of your friends, interest, and personal life, Google is useful if you're searching for something new, but that might be a smaller portion of overall queries.

[DCG]

An issue I see (based on my own use) is that organic results are typically more reliable than paid results. I hardly click ads, as I know the sites just paid to be there, and probably won't have as valuable information as sites displayed at the top of the organic search results.

 

 

 

 

[rpadebet]

GOOG knows what you buy, where you buy, what bank accounts you have, who your friends are, what you are recently interested in, where you travel and much more. They have gmail, maps and youtube + the most widely used browser now. FB,AMZN and MSFT for all their good qualities are not in a position to compete against this wealth of information. Goog can target much better than others. Conversion is a different thing, i think AMZN has a unique advantage here because visitors on their website already go there with an intention to purchase.

[ItsAValueTrap]

Is advertising on Google actually effective? Who actually clicks on their ads?

 

I do.  You have to understand that some people use Google research their purchasing decisions.  Suppose I want to find new balance shoes in Canada that I can buy online.  I will click the ads because I know that the ad likely links to what I want.

 

[yadayada]

At 25x earnings, this one looks attractive. If you discount their cash and securities, it is more like 21.5x earnings.

 

Then also factor in the huge R&D spend, and having larry page basicly controlling the company.

 

Then also consider still a growth of almost 20%, and one of the widest moats in history, and basicly a monopoly business.

 

Seems like if you have a more passive aproach to investing, this one should really be in your portfolio?

 

The huge R&D spend is unlikely to go lower soon. ANd more likely to go up though. But in this age of technology, you are basicly getting a free bet on technological breakthrough in whatever fields they are researching.

 

It seems even if they barely grow, this should deserve a 5% yield. Given the huge growth runway, it seems hard to not do 15-20% a year on this one. And all you gotta do is just wait and hold.

 

I read somewhere that larry page is also pretty obsessed in not turning google into a bureacracy. Or at least he used to be in the last decade. He might not care as much now.

 

A possible downside is that a lot of profits are poured into R&D that don't amount to anything. But Larry seems like a smart guy, so this seems somewhat unlikely.

 

Curious why it is not in berkshire's portfolio. And why few billionaire investors seem to be in this one. Didn't munger say that google could possibly have the greatest moat of all time?

 

Thoughts?

[wbr]

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/goog-google/

[yadayada]

oh i searched for it, but it didnt show up for some reason.

[jschembs]

oh i searched for it, but it didnt show up for some reason.

 

Probably because of the ticker switch. I'm almost always a microcap guy on the long side, but I do find this very interesting largely for the reasons you articulated.

[Liberty]

oh i searched for it, but it didnt show up for some reason.

 

Probably because of the ticker switch.

 

I changed the ticker on the old thread, should be easier to find.

[Palantir]

So if 21.5x earnings is low, what would you say is a fair multiple?

[oddballstocks]

Their market power is impressive.  Saw something yesterday on a new feature they created.  They scan your gmail for mentions of restaurant reservations or dining plans.  Then present something similar to opentable, and place it on a map.  They can crush competitors and deeply ingrain themselves into your life.

 

Ever considered getting rid of Google services?  Good luck, extremely hard.  Will Google be as dominant in 20 years?  I don't know, probably not, but I have no doubt they'll become the Oracle of the cloud.  At some level you just have to deal with them even if you don't want to.

[mttddd]

Is advertising on Google actually effective? Who actually clicks on their ads?

 

I do.  You have to understand that some people use Google research their purchasing decisions.  Suppose I want to find new balance shoes in Canada that I can buy online.  I will click the ads because I know that the ad likely links to what I want.

 

This also the majority of people are still not all that tech savy, the simple fact that you are on this board implies you know what you are doing on the internet. Average joe is likely to just click the first thing that shows up on google, aka ads.