GOOGL - Google

[giofranchi]

I've heard this many times before, but I am not sure I understand:

1) The founders are the largest shareholders: how could you run the company for the founders and not for shareholders?

2) As long as you have ideas to grow, to run a company for its employees might not be so bad after all: great employees lead to great ideas which in turn lead to great new products. New products that might earn lots of money for shareholders.

3) To pay a dividend and to buy back shares is not complicated stuff: if the founders thought it could be the best thing to do, they would be probably be paying dividends and buying back shares. Evidently, they think it is not yet that way. Just like Buffett doesn't pay dividends nor buys back shares.

 

The simple fact is that they have $86B in cash and $105B in retained earnings. 82% of every dollar they have ever earned is sitting in a "bank account". Idle. Only 18% of earnings were reinvested in the business or used to acquire other businesses*.

 

How much better off would Apple shareholders be if Steve Jobs had listened when Buffett told him to buyback shares (when Apple was $30 per share split adjusted)?

 

--

* In fact, things are worse than they seem. Instead of paying their employees with this excess cash, they pay them with undervalued stock.

 

On the other hand, it seems to me that the founders have done a pretty good job at keeping the price of GOOG's shares near FV, if not slightly undervalued, most of the times.

It seems that hoarding cash has at least this simple advantage: it gives the market a reason not to push a stock into bubble territory!

 

Cheers,

 

Gio

[atbed]

In other words, their capital allocation is very poor.

 

One concern I do have is that the effect of voice search (and getting the search results in audio format) on search advertising.  The Amazon Echo can't show display ads.

 

+1 on the YouTube link. But hard to argue that buying back shares wouldn't have created much value. At least they are starting to buy back some.

 

The voice search fears are interesting. How will they show ads for voice search on the Google home or on any Android devices for that matter? But I'm in the camp that they will figure out how to monetize. Another concern is Amazon. Specialist search engines have always been considered a threat. If Amazon wants to become "the Everything Store," don't we have to take this threat seriously?

[clutch]

In other words, their capital allocation is very poor.

 

One concern I do have is that the effect of voice search (and getting the search results in audio format) on search advertising.  The Amazon Echo can't show display ads.

 

+1 on the YouTube link

 

The voice search fears are interesting. How will they show ads for voice search on the Google home or on any Android devices for that matter? But I'm in the camp that they will figure out how to monetize. Another concern is Amazon. Specialist search engines have always been considered a threat. If Amazon wants to become "the Everything Store," don't we have to take this threat seriously?

 

"Ads" could be blended in as part of recommended services.

 

E.g., when I do a directions search on google maps, now I get a time / price estimate for using Uber and Lift.

[villainx]

With there balance sheet, Google has to give a reason why they aren't buying back or paying dividend. 

 

At this rate, they eventually will.  But it'd be nicer if they shared their thoughts on this more.

[KCLarkin]

On the other hand, it seems to me that the founders have done a pretty good job at keeping the price of GOOG's shares near FV, if not slightly undervalued, most of the times.

It seems that hoarding cash has at least this simple advantage: it gives the market a reason not to push a stock into bubble territory!

 

Yes but they are a net issuer of stock. So shareholders would be better off if it traded like a real FANG stock.

[Liberty]

The voice search fears are interesting. How will they show ads for voice search on the Google home or on any Android devices for that matter? But I'm in the camp that they will figure out how to monetize. Another concern is Amazon. Specialist search engines have always been considered a threat. If Amazon wants to become "the Everything Store," don't we have to take this threat seriously?

 

Amazon as a starting point for product searches is definitely a growing threat. There was a graph floating around recently (anyone has it?) showing how the % of people who start at Amazon rather than Google has been going up pretty rapidly over the years.

 

Amazon also has a growing advertising business, selling some spots on their homepage (ie. competing products paying to have a display ad on a competitor's page).

[atbed]

In other words, their capital allocation is very poor.

 

One concern I do have is that the effect of voice search (and getting the search results in audio format) on search advertising.  The Amazon Echo can't show display ads.

 

+1 on the YouTube link

 

The voice search fears are interesting. How will they show ads for voice search on the Google home or on any Android devices for that matter? But I'm in the camp that they will figure out how to monetize. Another concern is Amazon. Specialist search engines have always been considered a threat. If Amazon wants to become "the Everything Store," don't we have to take this threat seriously?

 

"Ads" could be blended in as part of recommended services.

 

E.g., when I do a directions search on google maps, now I get a time / price estimate for using Uber and Lift.

 

They undoubtedly have white boards full of ideas

[atbed]

The voice search fears are interesting. How will they show ads for voice search on the Google home or on any Android devices for that matter? But I'm in the camp that they will figure out how to monetize. Another concern is Amazon. Specialist search engines have always been considered a threat. If Amazon wants to become "the Everything Store," don't we have to take this threat seriously?

 

Amazon as a starting point for product searches is definitely a growing threat. There was a graph floating around recently (anyone has it?) showing how the % of people who start at Amazon rather than Google has been going up pretty rapidly over the years.

 

Amazon also has a growing advertising business, selling some spots on their homepage (ie. competing products paying to have a display ad on a competitor's page).

 

Not the graph that you are talking about, but this link talks about the same thing:

https://www.recode.net/2016/9/27/13078526/amazon-online-shopping-product-search-engine

 

[Jurgis]

Alphabet hasn’t disclosed the financials of Youtube yet, but we know it’s growing very fast and that Google is focused on growing the business rather than maximizing profits.

 

I am not sure that's true. It has been true in the past, but Google has been monetizing Youtube way more in last couple years (pretty much since Ruth Porat joined and started focusing the company on profits way more than before). Anecdotally you can look at the amount of ads in Youtube pre 2015 and after.

 

 

[atbed]

Alphabet hasn’t disclosed the financials of Youtube yet, but we know it’s growing very fast and that Google is focused on growing the business rather than maximizing profits.

 

I am not sure that's true. It has been true in the past, but Google has been monetizing Youtube way more in last couple years (pretty much since Ruth Porat joined and started focusing the company on profits way more than before). Anecdotally you can look at the amount of ads in Youtube pre 2015 and after.

 

Yeah, I would think the recent move to connect search data with YouTube ads is a pretty big move in this direction. But I'm sure they will still say YouTube is in investment mode

[merkhet]

If I remember correctly, half of that cash is overseas and would be hit with a big tax bill if brought back.

[Aurelius]

KCLarkin:

Shares outstanding went up 3% since 2013.

 

Regarding cash hoard. I think you might be right. The market probably isn’t willing to value the cash at fair value. As an investor I don’t worry about this (yet). GOOG has taking some active steps with the hire of Ruth Porat. Also GOOG is very public, operating in the US. It’s not some small obscure company being controlled by some family. In the fullness of time I suspect the cash will be fully valued. In the meantime you get great financial strength and the optionality this gives the company. Also this is sort of a “luxury” problems and quite easily fixed, should the company choose to do so.

 

Apple gets a lot of stick for not being more innovative and aggressive with their balance sheet. I’ve felt people have been too harsh on them. After all Apple buys back a lot of stock and pays dividend. But I suppose you could argue they should be more aggressive considering the strength of their balance sheet. In this regard I thought this comment was rather interesting. It’s Chamath again:

“...And that’s why working with corporations now matter because these big companies (the big tech) will continue to get bigger and bigger, and they’re gonna be able to consolidate, and it’s because they will have a very flexible view of what their balance sheet is meant to do. Their balance sheet is not meant to drive ROI. It’s meant to make sure they survive. And the folks that figure that out will survive, and the folks that don’t will get disrupted.”

https://www.cbinsights.com/blog/social-capital-vcs-healthcare-long-term-investing/

 

As investors it’s very easy to sit on the sidelines demanding more buybacks and dividends. And sometimes yea, that is absolutely the right thing to do. But I also think that what Chamath is saying here is very true. It’s not all about maximizing current ROI. What’s more important is making sure you are not being disrupted. That as a company you stay relevant in people's lives.

 

The big 4 - Apple, Alphabet, Amazon and Facebook - are so big and powerful now, that you really have to wonder if this time actually is different. That they will just get bigger and stronger as time passes by. That is, if they make sure that they keep expanding their influence in our lives through internal investments and buying up companies that could be the next “big thing” or have the potential compete if left alone.

 

Some months back I saw a CNBC interview where these investors commented on Amazon - on how AMZN used to be great high ROIC company, but that it had become a more asset heavy, less great company.

 

I truly believe this is completely wrong. Yes, AMZN could stayed more asset light and earned higher ROIC - for now. But they would have left the field open for other players to come in and serve customers better.

 

By lowering their returns AMZN were/are lengthening the durability of their returns. A very, very important point. Great execution imo.

 

So yea, the market probably discounts the cash, but I think patient investors will be rewarded.

 

[Aurelius]

Youtube concerns:

There’s no doubt GOOG is selling more advertising through the platform than it used to do.

Here’s Youtube CEO on profitability vs growth:

http://fortune.com/2016/10/18/youtube-profits-ceo-susan-wojcicki/

In short:

-Huge and expanding addressable market. Over 1B monthly active users.

-Investing a lot (in “investment mode”)- VR, across the globe, etc.

-18-28 year old watch 40% less regular tv than they used to

-Youtube reaches more 18-49 year old through mobile alone than any cable or broadcast network.

 

Two concerns I can think of:

Ad blockers. I honestly don’t understand why you wouldn’t install an ad-blocker (aside from the perhaps ethical issues). Your internet experience increases quite dramatically. No doubt there are an increasing number of people who feel the same way.

 

PewDiePie (youtube top creator) had this to say in 2015 on ad-blockers:

“It’s a number that has grown a lot over the years, from roughly 15-20 percent when I started. And it’s not unlikely that it will keep growing. What this means is that YouTubers lose about 40 percent of their ad income.

 

Personally, I’m ok with if you use Adblock on my videos. Ads are annoying, I get it, I’m not here to complain about that. But for smaller channels, this number can be devastating.”

 

You would think Youtube eventually figures out a solution…?

 

Another concern is that the vast majority of content being watched on Youtube is being produced by a small percentage - 5-10% or so I think. I'm not sure how legitimate this concern is, as I don’t see a competitor to Youtube.

 

 

 

[Aurelius]

Product search:

Amazon seems to be winning big in respect to where shoppers start their search for products:

 

There was also a graph going around where you could see in which categories Google and Amazon compete in. There was overlap, but Google naturally expands wider.

 

There’s no doubt there’s great competition between the two company’s. Not only through their products and services, but also in competition for staff. In fact Eric Schmidt has mentioned that Amazon is their number 1 competitor in search.

 

Although people don’t start their product searches as often on Google as they used to, Google still has managed to grow their advertizing revenue over 50% in this period (2013-2016).

 

Voice:

Interesting piece on search monetization: desktop vs mobile vs voice:

https://twitter.com/BluegrassCap/status/855400175615045635/photo/1

Basically: less advertizing space leads to a higher auction price.

 

Voice is exiting. I suspect we will all happily be using our voices more and more to “make things happen”. Screens though (seeing and reading), will always be number one - it’s quick, doesn’t disturb anyone, more controllable, etc.

[Liberty]

That's the one I was thinking of, thanks Aurelius:

 

[Aurelius]

Today's news --- YouTube bets its future on Asia:

http://www.cnbc.com/2017/04/26/youtube-bets-its-future-on-asia.html?__source=yahoo%7Cfinance%7Cheadline%7Cheadline%7Cstory&par=yahoo&doc=104426993&yptr=yahoo

[KCLarkin]

KCLarkin:

Shares outstanding went up 3% since 2013.

 

Exactly. So the shareholder yield is -1.3% per year. Pretty stunning for one of the most profitable companies in history.

 

The bull thesis outweighs this negative but as a shareholder you are paying a steep price for Google's "depression era mentality". Hopefully they will become more enlightened if there is tax repatriation reform.

[JayGatsby]

Product search:

Amazon seems to be winning big in respect to where shoppers start their search for products:

Google seems to be underinvesting in that area... not sure why. If I find a product on Google Shopping why can't I buy it easily with Google Checkout? They do a lot of cool things but it doesn't always feel like they have a unified strategy... ideas are launched and if they don't catch quick traction they just get forgotten. Seems like they'd be able to get small online retailers to sign up for Google Checkout (or just partner with Paypal) in an effort to hold (or gain) market share for those retailers vs Amazon. I bought something yesterday through Google Shopping and it's such a pain to order through a new store.

[Liberty]

Product search:

Amazon seems to be winning big in respect to where shoppers start their search for products:

Google seems to be underinvesting in that area... not sure why. If I find a product on Google Shopping why can't I buy it easily with Google Checkout? They do a lot of cool things but it doesn't always feel like they have a unified strategy... ideas are launched and if they don't catch quick traction they just get forgotten. Seems like they'd be able to get small online retailers to sign up for Google Checkout (or just partner with Paypal) in an effort to hold (or gain) market share for those retailers vs Amazon. I bought something yesterday through Google Shopping and it's such a pain to order through a new store.

 

Google doesn't have a retailer's DNA, and they don't have the frugal culture of Amazon and Costco and Walmart, so it's hard for them to effectively compete there, IMO. They've been at it forever (I remember the first "Froogle") and don't seem to be making nearly as much progress as other more focused players.

[TwoCitiesCapital]

Product search:

Amazon seems to be winning big in respect to where shoppers start their search for products:

Google seems to be underinvesting in that area... not sure why. If I find a product on Google Shopping why can't I buy it easily with Google Checkout? They do a lot of cool things but it doesn't always feel like they have a unified strategy... ideas are launched and if they don't catch quick traction they just get forgotten. Seems like they'd be able to get small online retailers to sign up for Google Checkout (or just partner with Paypal) in an effort to hold (or gain) market share for those retailers vs Amazon. I bought something yesterday through Google Shopping and it's such a pain to order through a new store.

 

Google doesn't have a retailer's DNA, and they don't have the frugal culture of Amazon and Costco and Walmart, so it's hard for them to effectively compete there, IMO. They've been at it forever (I remember the first "Froogle") and don't seem to be making nearly as much progress as other more focused players.

 

Agreed with this. It's been mind boggling to me that Google doesn't immediately offer coupons/discounts to local bars and restaurants that I'm searching or walking near in Google maps a la their competitor to Groupon. That's been so obvious to me since 2010/2011.

 

Also, why Google Maps wasn't one of the first major applications on Google glass so you could get directions driving where it highlights your route before your eyes. Seemed like an obvious application, but didn't happen. (Might be a bit more difficult to implement realistically, but seems within their ability).

 

Google just seems to miss a lot of the value in their networking their services instead of having each one be stand alone.

[mbreject]

They're slowly getting better at maximizing their shopping though. Before, it was free for advertisers to list their products on froogle. Then, they required advertisers to have an active Adwords accounts (so I could just pay to advertise 1 product and have 500 show up in Google shopping.) The last time I checked, it was PPC for everything.

[Aurelius]

Here's Chamath's answer as to why Amazon does this better and is the best company in the world (his words):

Chamath: Because it does something that is just so fundamentally utilitarian and it does it just incrementally better every day, and they’ve had to learn how to be good. That is a really hard thing, to learn how to be good. It’s not as if you have an inherently amazing business that builds on top of itself that is then handed to you that your job is to then monetize and not screw up. It doesn’t mean you can’t build hugely valuable businesses. It doesn’t mean they’re not great. They are fantastically run companies, but it’s just very different than trying and starting and living on single-digit margins and grinding for 20 years.

 

Different DNA.

 

It's probably also unfair to expect Google to maintain their search-lead over Amazon when shoppers search for stuff to buy. There's a lot more friction. Friction Amazon has been good at eliminating for shoppers - vast selection (1p/3p), great custumer service, fast reliable delivery (prime/fba), product reviews, low prices...

 

Of course Amazon has had to earn the number 1 position it now has, but at the same time this must have been Amazons goal for a long time. It's way more essential for Amazon to be shoppers number 1 starting place when for searching for new products, than it is for Google to maintain that position.

[atbed]

Here's Chamath's answer as to why Amazon does this better and is the best company in the world (his words):

Chamath: Because it does something that is just so fundamentally utilitarian and it does it just incrementally better every day, and they’ve had to learn how to be good. That is a really hard thing, to learn how to be good. It’s not as if you have an inherently amazing business that builds on top of itself that is then handed to you that your job is to then monetize and not screw up. It doesn’t mean you can’t build hugely valuable businesses. It doesn’t mean they’re not great. They are fantastically run companies, but it’s just very different than trying and starting and living on single-digit margins and grinding for 20 years.

 

Different DNA.

 

It's probably also unfair to expect Google to maintain their search-lead over Amazon when shoppers search for stuff to buy. There's a lot more friction. Friction Amazon has been good at eliminating for shoppers - vast selection (1p/3p), great custumer service, fast reliable delivery (prime/fba), product reviews, low prices...

 

Of course Amazon has had to earn the number 1 position it now has, but at the same time this must have been Amazons goal for a long time. It's way more essential for Amazon to be shoppers number 1 starting place when for searching for new products, than it is for Google to maintain that position.

 

As a long-time GOOGL bull, this is a scary scenario for me. What if our muscle memory defaults from searching on Google to searching on Amazon? If you read the Everything Store, Bezos is crazy ambitious and is still relatively "young" so he has a long road ahead of him. Thus far, there has clearly been room for both companies but at some point, this could change.

 

[Liberty]

When I want to buy something online, I start at Amazon, not Google. How about others here?

[Jurgis]

When I want to buy something online, I start at Amazon, followed perhaps by any other relevant retailers (electronics: BestBuy, newegg; furniture: Wayfair; groceries: Walmart; etc.). If it's non-Amazon-able purchase (e.g. flight), I go directly to the relevant site (e.g. Orbitz).

 

I pretty never search for purchasable things on Google.

 

 

 

 

I also use Bing for pretty much all my regular searches.  8)