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dswinters (87.96)

GOOGLE and Capital Allocation (Plus a major "day trading mistake")



December 02, 2010 – Comments (0) | RELATED TICKERS: GOOGL , BRK-A , IREBY

The Google purchase of Groupon seems to be quite head scratching. $6billion dollars for a company that was offer $2Billion by a desperate Yahoo!. First glance the numbers don't really work out. $6 Billion dollars for a company that does $500million-$1Billion in REVENUE per year. This means Google is paying a very pretty penny for a company that (quite frankly) can be copied and destroyed by a big bad Google.

 One Problem: Either Google isn't big and bad or they are lazy.

 They like the purchase because the connection to local business, but many local businesses are getting wise to the true costs of Groupon. There aren't many industries that can work on 25% cost of goods to break even. For example, my family owns a bar where the avgerage food cost is around 40%. If we sold a $50 Groupon for $25, we would collect $12.50 and for every customer in the door, we would lose. Now multiply that by potential thousands. Small biz has to bank on no-shows and people spending more to at least cover the margin. In addition, you have to ask yourself if these people are going to come back or just coupon buyers.

 The big question is, "Why didn't Google just copy Groupon's model?" Groupon was just an idea that can't be patented and would be easy to copy by one of the best companies in the world. Google seems to be rather lazy lately, just give everyone a 10% raise and everything will be fine. This brings up the root of this question, Capital Allocation.

Google is a cash printing machine. They simply know how to make money at certain things. However, besides Warren Buffett, many companies cannot use capital is a very effective manner. Corporate America is sitting on mountains of cash that is earning in the neighborhood of 1-3%. There has to be a better way to drive revenue, be defensive from other companies, and/or pay a dividend to your owners.

 Still think Oil is going to 100.

 I was one of the few (very few) that took a fake gamble (only did it in CAPS) and shorted Irish banks because I did not think Europe would give them such a good deal. However, I underestimated a few important principles that Ireland brings to the EU. Ireland is one of the better places to do business in the EU and even though they are small, they are viewed as a pioneer for the region. Big miss by me.

Thanks for Reading.

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