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TheDumbMoney (78.89)

Google Update



April 12, 2012 – Comments (9) | RELATED TICKERS: GOOGL , AAPL , SPY

Google reports earnings after the bell today.  Wall Street expects a small beat.  The Estimize whisper number expects a small miss.  Estimize is a network of financial bloggers whose predictions often been those of Wall Street analysts, who tend to be too optimistic for various institutional reasons.  On Apple, Estimize has pretty consistently nailed the earnings beats, while Wall Street has been too pessimistic on that one.

In honor of the upcoming earnings report, I updated my Google discounted cash flow analysis, which I have not done since November 2011.  Interestingly, while Google missed on earnings last quarter, its free cash flow for 2011 ultimately experienced huge growth.  Here is my blog post on my blog, The Dumb Money.  Here is a direct link to the spreadsheet on Google Docs.

Note that really my buy at $620 is a really, really rough estimate.  I suspect the true buy range is somewhere between $600 and $670 per share.  I never buy stock before earnings come out though, making me the opposite of most people.  Why would I?  As a long-term holder, why on earth would I want to buy stock before the most recent knowledge about the company is available?  Does it mean I might miss a $10 move in the stock?  Maybe.  But $10?  In the grand scheme, I'd rather have the additional clarity and certainty.

9 Comments – Post Your Own

#1) On April 12, 2012 at 1:43 PM, ElCid16 (94.06) wrote:

while Google missed on earnings last quarter, its free cash flow for 2011 ultimately experienced huge growth

A large part of its FCF growth was due to a huge spike in stock-based compensation expense - not exactly the source for FCF growth that you'd like to see.  It grew from $1.38B to $1.97B ('10 to '11).  Google is grossly notorious for dishing out stock to its employees, every. single. year.  Maybe that's just what it takes to keep all that "talent" in house.

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#2) On April 12, 2012 at 1:48 PM, ElCid16 (94.06) wrote:

Missed this the first go-round: deferred income taxes also spiked from $9MM to $343MM from '10 to '11, too.  Could very well be a ($350MM) drain on FCF, next year...

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#3) On April 12, 2012 at 2:17 PM, TheDumbMoney (78.89) wrote:

Good points.  This is meant just to be a basic look at FCF.  You are absolutely correct that aspects of FCF can be problematic.

Investments in property also dropped, which could be a problem.  However, in fact it is likely somewhat good as investments in property have vastly outpaced D&A in most recent years and that is likely the result of wasteful spending.

The vast majority of FCF is derived from net income and D&A.  The stock-based compensation has not yet reached a level that makes me uncomfortable, given the cash Google is banking every quarter, and given the extremely fierce competition it faces from the likes of Facebook too keep its employees.  This is not a case of a company just willy-nilly handing out stock awards because it values employees more than investors.  For that, see Cisco for most of the last decade, as well as the bonus structures of all major investment banks.

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#4) On April 12, 2012 at 2:38 PM, ElCid16 (94.06) wrote:

This is not a case of a company just willy-nilly handing out stock awards because it values employees more than investors. 

Fair point.

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#5) On April 12, 2012 at 3:23 PM, TheDumbMoney (78.89) wrote:

ElCid, in that regard, note how Google's stock awards have risen in conjunction with the rise of Facebook.  Google does not like the fact that it is no longer the coolest kid on the software programming block.

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#6) On April 12, 2012 at 4:02 PM, ElCid16 (94.06) wrote:

You're right in that stock compensation expense might be a "necessary evil" in order to retain employees.  But I wouldn't label Facebook as its only talent competitor (albeit, a big one, yes).

Google has been in a decade-long battle with VC firms, PE firms, ibanks, consulting companies, hedge funds, etc. for claiming the top talent coming out of top schools.  Google was dealing with this dilema well before Facebook became the "coolest kid on the software programming block." 

I actually haven't looked at their historical stock compensation expense figures -  I just know that the numbers make up a substantial (10-20%) portion of OCF every single year.

As long as they keep growing EPS, I guess you're right - there might not be too much reason for concern.  Not sure if you're a shareholder or not...if you are, good luck this afternoon! 

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#7) On April 13, 2012 at 11:49 AM, leohaas (29.47) wrote:

Nothing about the stock split and the resulting power grab? Isn't this contrary to the interest of long-term stock holders such as yourself?

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#8) On April 13, 2012 at 12:17 PM, TheDumbMoney (78.89) wrote:

Hi Leo, the above post is just about FCF, and was written before the earnings report, conference call and letter.

But since you ask, I think it's a tempest in a teapot.  :-)

1) Nobody votes their shares anyway, for one thing.  This matters only at the margin, for the largest potential holders.  This letter is written to the Dan Loebs of the world, not to me.  Personally, I welcome this tax-efficient distribution.  In law school I studied with one of the foremost experts on corporations law in the U.S.  The entire corporations code, particularly the Delaware code, but also interpretive Scotus law and the law in many other states besides Delaware, is set up minimize the power of shareholders to control the company.  In fact, it may surprise you to know that from a legal perspective, it is actually probably incorrect even to think of shareholders as true "owners" of a company rightly or wrongly.  (Think about the typical descriptive components of ownership.)  The whole bru-ha-ha is therefore very boring to me.  For governance, I'm more concerned with executive compensation packages, board elections, etc.  Nothing in the Google letter changes general proxy rules, or the general law, which is where the problem if any is.

2) More substantively, most of the time people feel positively about visionary founders staying with the company and in control of it!  What-up here?!?  As to these founders, they have done absolutely nothing so far to indicate to me they are not the best people to have in charge.  I am particularly impressed by how Google has responded to Apple with Android.  I am extremely unimpressed by the stock stagnancy since 2007, since it had gotten way ahead of itself at the time, and growth while it has slowed from 100% per year is still titanic for a company this size.  As a long-term investor, I am driven by the fundamental performance of the company, which means: 1) by performance numbers, and 2) by the strength of the business model; and 3) by innovation expectations.  So I could care less about the so-called power grab.  I am vastly more concerned by the drop in CPC, which likely indicates greater competition from Facebook and maybe Bing in Google's core revenue-generating business.

Best wishes,

The Dumb Money!/The_Dumb_Money

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#9) On April 17, 2012 at 6:27 PM, leohaas (29.47) wrote:

DTAF: Now THIS is what I mean!

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