GOOGL - Google

[yadayada]

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

35x right now. But this is not about what it is worth next year. But what it is worth 10 years from now. They spend over 10bn$ a year on R&D, so either this will pay off on some front (like google self driving cars, or AI systems) or this number will go down. Page is still pretty young, and I doubt he will just piss away 100's of billions $.

 

So if you take true earning power of the core business, it might be closer to 15x earnings (including the cash).

 

I read the other trhead, and someone pointed out that there is huge pent up earnings power in a lot of developing countries. And still a lot of (older) people use things like yellow pages, which should slowly die out over the next decade. My dad still looks up everything up in yellow pages.

 

So as more and more people will use google (i think habbit is huge in this, so young generation is much more likely to use it), it's advertising value will go up. Which means pricing power.

[rkbabang]

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.

 

 

For people over a certain age there is a huge difference between the computer geeks like me and many of us on this board versus the average Joe (I've been using computers since the early 1980's and the internet since the early 1990's), but this difference goes away almost entirely for the younger generations.  My kids were both born in the 21st century and have never known a world without computers and the Internet.  I have to think that even the most unsavvy computer users in my kids' generation and those to follow will know full well the difference between search results and an advertisement.  Am I correct in thinking this? And does this mean that ads will be less profitable as time goes on?

 

[Liberty]

I haven't followed Google closely in a while, so my analysis is probably shallow, but there's a challenge that I see on the horizon for them.

 

Not that Bing will suddenly really compete in search. Rather, that as an advertising company, they'll find that their customers (the people who pay for advertising, not the people who click on ads) start spending their dollars differently, and maybe they don't get quite the share of the pie that they used to.

 

More online activity is moving to mobile and to apps, and away from the web and search. Facebook has a lot of information on everybody to target ads because people voluntarily fill out profiles and tell them everything, along with their real names and relationships, etc. Google tried to get that kind of data with Google+, but that was mostly a failure, and despite them tracking you as much as possible with cookies and such, their targeting is a lot less precise, and that breaks down even more on mobiles and in apps.

 

So search could stay just as ahead of everybody technically as before, but it could start attracting relatively fewer advertising dollars than before. Same for third party site banner and text ads, where the desktop experience is optimal.

 

Google's search+advertising business is one of the almost uniquely good businesses of the past century. It's almost like a Visa/Mastercard.

 

This means that almost anything they invest in with their heavy R&D spend will, at best, create much inferior opportunities and dilute that primary cash generating engine. It's kind of like I don't expect Visa/Mastercard to create something as good as what they have, so after they spend on growing the moat, buybacks/dividends are the best use of capital.

 

Some of Google's projects might help make the flywheel spin faster or dig the moat a little, but a lot will probably prove to have very low ROI if any (though they might be good for society, that's a different thing from being good for shareholders).

 

I think that to understand Google's future, you have to look very deeply at advertising on mobile. It's not something I feel I understand well enough, but I think the answer is probably there. Too many people seem to forget that Google is, from a business point of view, mainly in advertising rather than Search or whatever. They can have the best search in the world, but what people will pay to advertise with them might fluctuate significantly when there are big shifts in the landscape (mobile being one). These changes might not happen slowly either, and they might not be obvious looking ahead. Some will say "Google's doing well with mobile so far", but rather than a fall on their part, it can be the rise of others that sucks dollars away from them. Right now advertisers might not feel they have good enough alternatives, but someday, maybe they will.

 

My feeling is that some people might underestimate the longer-term challenges of mobile for the company and project the recent past forward without taking into account this important inflection point.

[saltybit]

 

I think the information that Google knows about you is just as valuable as what Facebook knows. (if not more.. given there is more intent with Google usage) Facebook's advantage is user identity. People are logged in when using their apps, vs what the traditional ad network has to do with stitching together ids across various devices.

 

While Facebook consumes a lot of user's time on mobile, Google can still capture a big part of the pie if they have a broader reach in terms of embedded SDKs in apps. They own some of the top mobile advertising networks (Admob). Don't forget they also have the Play Store, and fixing app discovery on that could make it so that app developers will have to spend money on it as well.

 

I'm not sure why Google doesn't fix the Play store to enable discovering apps in a better way....

 

Relatively recent article from Nov 30 2014 about app install advertising http://techcrunch.com/2014/11/30/like-advertising-a-needle-in-a-haystack/

 

Some stats on app usage from ComScore http://www.comscore.com/Insights/Blog/Major-Mobile-Milestones-in-May-Apps-Now-Drive-Half-of-All-Time-Spent-on-Digital

 

This page has some interesting stats from Aug 2014 http://techcrunch.com/2014/08/21/majority-of-digital-media-consumption-now-takes-place-in-mobile-apps/

[Liberty]

I quite agree that search ads are probably the best kind of ads because there's intent embedded into them.

 

But the question is, is search going to keep growing in value as fast as it has in the past, and will Google be as competitive in non-search parts of the advertising business, which are pretty huge.

 

I'm not saying I expect them to stop growing. Just saying it's not quite clear to me that the rate of growth and level of profitability that some people are expecting is quite a done deal.

[saltybit]

I agree that it would be hard to get the same amount of market share (65-70%) as search

 

Just some general thoughts...

Advertising could be broken down to:

1. knowing who you are (tying you to the info they have on you)

2. the amount and quality of information that they have on you (how predictive is it for conversion?)

3. chances to show you an ad.

4. for those "chances", parsing the context to match the right ad to you (easier to match textual content/adwords to an ad compared to video or images.. but both FB and Google are investing in this, see deep learning and the machine learning talent both are assembling)

 

For mobile:

Facebook has #1, #2 for them is probably not as good as Google but predictive enough. (this is getting better though especially with 3rd party transaction data supplementing what Facebook has on you, for conversion attribution. Not sure if privacy laws allow them to use it for ad targeting)

#3 looks good for now, since even though core FB usage is not growing/declining, there is still Instagram and Whatsapp.

 

Google has #1 for:

- people who use stock android with play store

- people who use a non-Google app with one of Google-owned SDKs

- with a Google app installed

 

Google is probably best for #2, other than heavy Amazon users. In that case Amazon prob has better data.

They have to do better for #3. They do have YouTube and mobile search, otherwise they rely on mobile ad networks. There are many ways around this though, acquisitions (Pinterest?), courting more apps to use their ad platform, or trying to change the way we interact with digital. (new devices)

 

I haven't checked this, but Facebook probably either has higher margins (for mobile) or charge less to advertise, given that they play both the roles of publisher up to the ad network part of the advertising ecosystem. They do sell remnant inventory via demand-side platforms...

 

Google's search is also getting threatened by Amazon, since most people are now using Amazon as the default for shopping, instead of searching on Google. I think Amazon spent a lot on Google advertising previously, and this is prob declining now. (as a % of revenue)

 

 

I quite agree that search ads are probably the best kind of ads because there's intent embedded into them.

 

But the question is, is search going to keep growing in value as fast as it has in the past, and will Google be as competitive in non-search parts of the advertising business, which are pretty huge.

 

I'm not saying I expect them to stop growing. Just saying it's not quite clear to me that the rate of growth that some people are expecting is quite a done deal.

[siddharth18]

I think that to understand Google's future, you have to look very deeply at advertising on mobile. It's not something I feel I understand well enough, but I think the answer is probably there. Too many people seem to forget that Google is, from a business point of view, mainly in advertising rather than Search or whatever. They can have the best search in the world, but what people will pay to advertise with them might fluctuate significantly when there are big shifts in the landscape (mobile being one). These changes might not happen slowly either, and they might not be obvious looking ahead. Some will say "Google's doing well with mobile so far", but rather than a fall on their part, it can be the rise of others that sucks dollars away from them. Right now advertisers might not feel they have good enough alternatives, but someday, maybe they will.

 

Well Google's search revenue is basically calculated by multiplying (1) the number of searches by the (2) effective revenue per each search.

 

If you're long Google, you're ultimately betting that the sum of (1) multiplied by (2) goes up over time.

 

(1) should go up over time if more users get online, more users find internet search relevant and useful to their lives.

 

(2) should go up if/when advertisers can monetize a percentage of search ad clickers.

 

With respect to (1) - Look at the % of human population that doesn't have access to internet. I know it sounds like pie-in-the sky estimation, but Google literally is the one place that I think will dominate the search business many years from now as they are deeply entrenched and have the mind-share. Google is already there and it exists everywhere. But there needs to be infrastructure (internet access) and devices in order for the rest of humanity to access it.

 

With respect to (2) - Internet search traffic/users become more valuable over time as advertisers learn how to monetize the traffic, optimize their sales funnel/process. Consider the fact that in a lot of developing countries, most commerce is still conducted offline. Over time, I think (2) will explode in developing countries as their economies grow and as more advertisers join Google and compete over search traffic. There will be a lot more competition from Indian Car Insurance Companies for Indian users searching for "car insurance," compared to today. Because (i) more advertisers (in this case - car insurance agencies and companies) will have joined Google in the next five years, (ii) more users in India will get comfortable transacting online in order to buy car insurance and (iii) there will be more demand for car insurance in India - per capita - in five years.

 

With respect to mobile, I think it all depends on how valuable the search traffic is to the advertiser. If a user searching for "car insurance" or "web hosting" or "bankruptcy attorney" on mobile still generates same revenue as a desktop user, the advertiser will pay Google same per click for a mobile visitor, as he would for a desktop visitor.

 

Understand this - In the long run, mobile traffic is only less/more valuable to the extent that it increases/decreases the commerce compared to desktop traffic.

[Liberty]

This seems to assume that mobile is just desktop on a small screen. But what if users keep increasing the time that they spend inside apps rather than on the open web? Want to buy something, fire up your Amazon or Costco or Walmart or QVC or eBay app. Want to check the news and what's going on? Fire up Twitter or Facebook, or the CNN app. Etc. Maybe people who want to buy a car will at some point just get apps from GM and Ford, etc, because these apps will one day be so much better than the websites (with localized dealership integration?), etc.

 

On the desktop, the starting point was often search. On mobile, it appears to be increasingly less so.

 

That's not to say that there won't be more searching done year after year in absolute terms, just that advertising dollars follow potential customer's attention, and Google can't penetrate the world of apps the way it permeates the open web. So I'm not as certain about their growth rate as I would've been a few years ago.

 

As lots of companies finally crack mobile advertising over the coming years, advertisers might get many more appealing options than they ever had online before. And this increase of choices and inventory might also drive overall advertising prices down.

 

Just thinking out loud. I don't know.

[merkhet]

I don't know if mobile advertising is crackable. The real estate is so small that I wouldn't rule out the possibility that mobile becomes the main method of search and yet no one can make it profitable.

[Liberty]

I don't know if mobile advertising is crackable. The real estate is so small that I wouldn't rule out the possibility that mobile becomes the main method of search and yet no one can make it profitable.

 

I tend to think it is. If it's big enough for content, it's big enough for some form of ads. They might just not look like ads on a bigger screen.

 

For example, part of how Facebook makes money is selling reach. When corporate accounts post something, they only reaches a small fraction of their followers organically (because it's all mediated by the news feed algo). So you pay up to reach more people. You also pay to increase your number of followers (the algo recommends you to more people than it would organically if you pay). That's one non-conventional way to "advertise" (company pays money to reach potential customers -- it doesn't have to look like a banner ad). There might be other similar models.

[frommi]

Damodaran has spoken about valuing Twitter, Uber etc. at the CFA in November.

 

http://www.valuewalk.com/2014/11/aswath-damodaran-cfa-conference-numbers-narratives-modeling-storytelling-investing/

 

Its after the 50 minute mark. To value google its probably a good idea to look at the total advertising market and look how much google already adresses and how much it can grow going forward. Its not based on clicks or per clicks or something from that side, its all about looking at the whole advertising market and its growth and googles market share/margins of/on that. The online ad market can`t grow with double digits much longer than 5-10 years because at some point it would be bigger than the advertising market as a whole. Newspaper/magazine advertising has still some room to shrink but at some point there is nothing left and the online advertising market will grow with the same rate as the advertising market.

 

After the 1:20 mark he talks about the whole social media sector valuation based on the whole advertising market, according to him the whole sector is over-/full valued at the moment. So either FB,TWTR etc. are a lot overvalued, or google is not undervalued. Or i misunderstood something :).

[yadayada]

couldn't the self driving car thing become really big in the future? Sort of like a royalty to google for every car manufacturer? Or possibly some things in biology they are doing. What about their satellites? Couldn't this add value in some way? If musk finally figures out how to flood our atmosphere with cheap satellites.

 

It just seems like a lot of companies waste money on R&D, but it really sounds like Larry page is really on top of google's R&D. And it is not like microsoft.

[Liberty]

couldn't the self driving car thing become really big in the future? Sort of like a royalty to google for every car manufacturer? Or possibly some things in biology they are doing. What about their satellites? Couldn't this add value in some way? If musk finally figures out how to flood our atmosphere with cheap satellites.

 

It just seems like a lot of companies waste money on R&D, but it really sounds like Larry page is really on top of google's R&D. And it is not like microsoft.

 

Maybe. What other good businesses has their non-core R&D produced so far, though?

[karthikpm]

What about You Tube? I think it has still room to grow.

Google's search algorithm is still superior to others.

 

Nest and other devices will let google get into the ecosystem of everything .

[Guest longinvestor]

Since I spend 4 to 12 hours a day in front of a screen, both large and small screens, I cannot wait for the day when I can rid myself of annoying ads and worse, someone who is tracking my every click, move, message, what I'm reading etc. Plus opening myself up to cyber attacks, credit stolen etc. I'm being stolen from.

 

I would happily spend several hundred dollars per year right now to get an internet experience that is free from the feeling of being stolen from. Although everyone is doing it, I despise Google for starting this whole damn thing. So the choice I've made is to use Bing now whenever possible. Bing has been sending me rewards, which I've not cashed in yet. 

 

It is coming, the two-tiered internet. Paid (prying-free) internet versus the universal (perceived free) internet as-we-know-it. That will mark the beginning of the end of Google. This is why they are on the crusade hooking up towns across America with the Gigaband networks. Seemingly they are now the consumers' hero for doing something the ISP's are slow to do, but Google has everything to lose with a two tiered internet and they don't want to lose it. They will, anyway. Between western governments like Germany and other EU countries, the ISP's and their own wannabe competitors like FB, AAPL etc, their list of enemies is growing. Ultimately, it is going to be ordinary folks like me who don't want to be spied on, who will have the last word on this.

[ItsAValueTrap]

Since I spend 4 to 12 hours a day in front of a screen, both large and small screens, I cannot wait for the day when I can rid myself of annoying ads and worse, someone who is tracking my every click, move, message, what I'm reading etc. Plus opening myself up to cyber attacks, credit stolen etc. I'm being stolen from.

 

I would happily spend several hundred dollars per year right now to get an internet experience that is free from the feeling of being stolen from. Although everyone is doing it, I despise Google for starting this whole damn thing. So the choice I've made is to use Bing now whenever possible. Bing has been sending me rewards, which I've not cashed in yet. 

 

It is coming, the two-tiered internet. Paid (prying-free) internet versus the universal (perceived free) internet as-we-know-it. That will mark the beginning of the end of Google. This is why they are on the crusade hooking up towns across America with the Gigaband networks. Seemingly they are now the consumers' hero for doing something the ISP's are slow to do, but Google has everything to lose with a two tiered internet and they don't want to lose it. They will, anyway. Between western governments like Germany and other EU countries, the ISP's and their own wannabe competitors like FB, AAPL etc, their list of enemies is growing. Ultimately, it is going to be ordinary folks like me who don't want to be spied on, who will have the last word on this.

 

Or.... you can install Adblock.

 

I have Adblock installed and I still allow the ads on Google search.  I find those ads useful.

Google's display ads:  Annoying but I could live with them if Adblock didn't exist.

Youtube ads:  Unbearable.

 

The resiliency against Adblock is a plus for Google's search advertising business I think.

 

Although everyone is doing it, I despise Google for starting this whole damn thing.

Not that it matters but I don't think Google started it.

[moody202]

It is coming, the two-tiered internet. Paid (prying-free) internet versus the universal (perceived free) internet as-we-know-it. That will mark the beginning of the end of Google. Ultimately, it is going to be ordinary folks like me who don't want to be spied on, who will have the last word on this.

Two-tiered internet also needs a search engine. Why would Google go away under that scenario?

If I owned the local catering business, I want my paid ads to show up when you search for catering vendors. My ROI on google/online ads is measureable and better than any other medium so I will gladly pay Google for it

 

Ultimately, it is going to be ordinary folks like me who don't want to be spied on, who will have the last word on this.

Google is collecting data on you anonymously; NSA is openly collecting data on you and profiling you. Which one scares you more?

 

I am with Sidharth on this one. While there are very real concerns expressed against Google (like mobile apps), online adverting is still a growing market. Think about population increase, developing markets.  Even if Google gets a smaller piece of the action, the pie itself is growing which should keep Google’s growth intact for now.

 

Speaking of mobile apps, the search in these apps doesn’t quite replace Google search. If a search for something in Amazon app, my scope is limited to Amazon not the world wide web! 

 

As a Google shareholder, I urge you to click all the paid ads with your next Google search! I want them to continue getting their advertising dollars  ;)

 

Has anyone recently done a valuation of Google that they are willing to share?

 

[yadayada]

What about You Tube? I think it has still room to grow.

Google's search algorithm is still superior to others.

 

Nest and other devices will let google get into the ecosystem of everything .

yeah could this not become big?

[saltybit]

To circle back to Google Play and give you a taste of how bad Google's recommendation technology is:

 

http://blog.echen.me/2014/10/07/moving-beyond-ctr-better-recommendations-through-human-evaluation/

 

(interesting chart from the post)

https://dl.dropboxusercontent.com/u/10506/blog/human-evaluation/amazon-bn-google.png

 

This is for books but I notice some of the same for apps...

The caveat for the post above is that AMZN and BN should have a lot more data about books than Google.

[Palantir]

What about You Tube? I think it has still room to grow.

Google's search algorithm is still superior to others.

 

Nest and other devices will let google get into the ecosystem of everything .

yeah could this not become big?

 

If only Google actually had the ability to execute on it and build a business model not related to search or display advertising. It has failed to show it can.

[meiroy]

 

I recently opened a position in Google. Again. Mostly due to qualitative reasons, though.

 

If I were to imagine that we are now 5 years in the future and we are looking back to find reasons why Google succeeded or failed, Google passes the test for me. Facebook, OTOH, easily fails.

 

BTW just read How Google Works. Highly recommended.

 

[KCLarkin]

For those worried about mobile, it wasn't too long ago that Facebook was selling off due to mobile fears.

 

Also, Google has two hidden crocodiles in its moat:

- the ability to attract world class engineers

- the cash to make moat-widening acquisitions

 

I think part of the Google sell-off is just an unwinding of the short apple / long google pair trade from 2013.

 

[siddharth18]

Not sure if it's posted before, but here goes:

 

http://abovethecrowd.com/2009/10/29/google-redefines-disruption-the-less-than-free-business-model/

 

http://abovethecrowd.com/2011/03/24/freight-train-that-is-android/

 

http://www.marketwatch.com/story/buffett-munger-praise-googles-moat

[innerscorecard]

Looks like a lot of criticism of Google in the press as of late.

 

Seems like a classic case of the perception of a business (as opposed to the business itself, perhaps) shifting to a different part of the "business life cycle," as Damodaran puts it.

 

Of course the above is not very relevant for any evaluation of Google the company. I am just curious to think of examples of other companies with ownership and control structures similar to Google that have undergone this shift in the business life cycle, if it indeed is something that actually exists in the real world. What form would activists advocating for capital return at Google take?

[karthikpm]

A Dividend? With their share class structure , activists would have a hard time creating change