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13 Mrt '08 - + 0 - 0 Aandelen Google kunnen verder dalen tot $350 (was $747,=!)

Het Google aandeel (GOOG op Nasdaq) heeft de afgelopen dagen weer een stijging doorgemaakt als gevolg van de goedkeuring van de overname van Doubleclick door de Europese commissie. Er zijn echter steeds meer geluiden dat de daling nog niet ten einde is en dat de Google aandelen nog verder kunnen dalen tot zelfs richting de 350 usd. Daarmee scoort Google zeer veel slechter dan bijvoorbeeld haar concurrenten Apple, Yahoo! of Microsoft.

Afgelopen week werd er een artikel van "Barron's" gepubliceerd waarin de stelling rond de daling van Google werd ingenomen. Ik ben het niet geheel eens met zijn analyses, maar verwacht wel dat de daling er gaat komen.

Het volgende artikel wil ik jullie niet onthouden:

This weekend's Barron's has article by Jacqueline Doherty titled
"Google's Next Stop: Below 350?" The main thesis of the article is
that analysts have not reduced earnings estimates for Google (GOOG) to
account for the expected reduction in clicks and corporate ad
spending. The article recommends staying clear of the stock until Wall
Street recognizes that Google's revenues will be hurt by an economic
slowdown and management starts cutting expenditure in non-core areas.
To be fair the author acknowledges that Barron's (specifically she)
has been consistently wrong about Google in the past; others have
called her out for her hand-waving articles. Further her assertion
that Wall Street have not come down is incorrect. Yahoo! Finance shows
that earnings estimates for the current quarter have fallen from $4.86/
share to $4.65 over the past 90 days. Estimates for FY08 have fallen
from $20.69 to $19.98.

I feel that one big challenge which Google faces is that they have
consistently spurned Wall Street. Google's IPO was not managed by the
big banks that lost out on the massive underwriting fees big IPOs
generate. They do not provide earnings guidance to make the job of
analysts easy. Wall Street is forced to follow Google because of its
performance; not because Google reaches out to them.

Similarly the financial press is not too enamored of Google. Google
represents the biggest threat to Madison Avenue and traditional media
advertising. As a result whether it is raising privacy concerns or
questioning their future growth, it has a tendency to put a negative
spin on Google.

In an earlier post I had wondered whether Wall Street properly values
the brand loyalty which Google inspires. Barron's comment's on
spending in non-core areas seems to highlight that the financial press
and Wall Street continues to refuse to see the forest for the trees.
In this article I will try and translate Google speak into Wall Street
speak to help them understand a few things.

Non-Core Expenditure: A quantitative look

I felt it was prudent to dig into the size of the non-core expenditure
which Wall Street is so disgruntled about.

Google's press release says the following:

In 2008, Google expects to spend tens of millions on research and
development and related investments in renewable energy. As part of
its capital planning process, the company also anticipates investing
hundreds of millions of dollars in breakthrough renewable energy
projects which generate positive returns.

For the sake of discussion, let me assume that Google will spend $50M
in the energy initiative (tens of millions) in 2008. In 2007 Google
had a net profit of $4.20B and $16.59B. So $50M is about 1.2% of
Google's profits and 0.3% of its total revenue in 2007.
A Game of Scale

Imran Khan, an analyst from JP Morgan, once noted that the dirty
little secret of the search business is that scale matters a lot. The
amount of data available on the web continues to grow exponentially.
As the emerging markets come on line, this growth will not see any
significant slowdown. The number of search queries also continues to
grow. In order to handle this growth, search providers will continue
to build and operate huge server farms which consume a lot of energy.
As early as 2005, Google engineers had warned that the energy costs
will outstrip the cost of the servers. And the cost of energy will
continue to increase as demand in emerging market gallops ahead.
Google's last earnings release also had the following comments:

Other Cost of Revenues

Other cost of revenues, which is
comprised primarily of data center operational expenses, credit card
processing charges as well as content acquisition costs, increased to
$516 million, or 11% of revenues, in the fourth quarter of 2007,
compared to $441 million, or 10% of revenues, in the third quarter of
Incidentally this expense was 8% of total revenue in Q3-2006. Clearly
data-center operational expenses are increasing. If Google is even
moderately successful in its efforts to find lower cost sources of
energy, the effect on its bottom-line will be direct and visible.
Many firms often spend a lot more in so-called restructuring charges,
which Wall Street very conveniently ignores. However, Google is being
skewered in the financial media for trying to improve its long term
Wall Street should view this as an investment in efficiency and cost-
reduction, not as a speculative pie in the sky dream. Most high-tech
companies have in house investment arms which fund promising start-
ups. Think of the growth in the market cap of SunPower and Cypress
over the past few years.

Google Speak:

Renewable Energy at a lower cost than coal
Translation into Wall Street Speak:
Operational Efficiency (reduced energy costs)
Start-up Fund (SunPower)

The Google X Lunar-Prize

I often wonder what Google itself spends on advertizing and brand-
building exercises. I do not recall seeing any paid advertisement by
Google; I do remember the yodel in the Yahoo! jingle on TV. I do not
have the exact statistics available, but Google does not seem to spend
anywhere close to other major corporations with similar revenues.
Jeff Macke on Fast Money has been taking swipes at Google's space-
program. The Google X-Prize has a total commitment of $30M, assuming
someone is able to meet the challenge. It generates a lot of free
press and publicity for Google. Further it captures the imagination of
the younger generation all over the world; many of these countries
value science and technology a lot more than the US and the US media.
Incidentally, many Wall Street execs make more than that in a year;
the same firms spend a lot more in brand-building advertisements in
different media. Many studies have suggested that Google is a lot more
popular among the younger and wealthier portion of the population;
clearly something which bodes well for Google.

Google Speak:
Google X Lunar Prize
Translation to Wall Street Speak:
Inexpensive Brand Building Campaign

The Positives about Google

Google is a metrics driven company. Any new idea gets a chance to
appear on the internet. It is estimated that at least 10% of web-
impressions produced by Google have some kind of experiment and
measurement metric embedded in them. Google is unique in having both
the ability and the inclination to measure the real-time performance
of its new efforts.

To give you an example, Microsoft Live Search tries to measure the
efficiency and the quality of its search result by asking a question
'Is this useful?' next to the search results. Google instead studies
whether user clicks on the link to measure the usefulness. There lies
the difference. Microsoft seems to be stuck in using the traditional
method of a survey (which have their own biases) while Google studies
user-behavior to measure the same.

Stickiness as a measure of ROI

The metric driven approach gives Google the ability to try and measure
the effectiveness of new ideas and projects. It allows them to invest
in projects which provide the greater ROI and cut the under-

What Wall Street perhaps fails to understand is that Google does not
necessarily measure ROI by how directly the feature translates to
dollars. The cool features which Wall Street cannot see Google
monetizing provide Google with the brand loyalty needed to preserve
their status as the web's #1 destination.

Over the past few months I have made Microsoft Live Search as the
default search engine for my browser. However more often than not I am
forced to repeat the search on Google to get the results I want. There
is a difference and Google's increasing search market share speaks for

The end-user stickiness is critical in a domain where it takes just a
mouse-click to switch loyalties.

Customer Satisfaction as a measure of ROI

Google has been making changes to improve the quality of results it
offers to advertisers. This article has a nice discussion the changes
which Google is making. All these changes are going to provide a short-
term blip in the growth Google's revenues. However, they are all
designed to make advertisers more loyal to Google by providing them
with greater confidence in the value of their investments. As the
online advertising industry consolidates, making sure that the people
who pay the bills are happy is a laudable goal. It again comes to down
to increasing the stickiness of people who use Google.

YouTube: Driving the next wave of online advertising

There is a lot of fear about Google not being able to monetize their
other big investment, YouTube. Perhaps Google is a victim of its own
success here since it is the benchmark used to compare monetization on
the web, Yahoo! being the classic underperformer.

I think it is prudent to step back a bit. Google had its own video
service but they realized that YouTube was gaining traction and brand
recognition at a pace where it was better for them to overbid than
risk losing the pole position in the next big wave. Google paid
$1.65B, about 10% of its 2007 revenues to buy YouTube.

Since then they have been clearing up the copyright hurdles
surrounding YouTube, building partnerships with content providers
(YouTube channels) and distributers (iPhone). And by not cluttering
the videos with pre-roll or post-roll advertisement, YouTube has
consolidated its position as the number one destination for online
video content. The contrast is obvious to see. Yahoo! and use
pre-roll and post-roll ads where I am forced to see 15 seconds of
Roger Riney (CEO of Scottrade) in his helicopter after every 1 minute

The statistics from Alexa are mind-boggling. About 20% of all web-
surfers visit YouTube; they view 15.5 pages per visit (they hang
around the site), and the site ...



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