While Google (GOOG) is best known for its amazing search engine, let’s face the reality that it’s much bigger than that. Sure they have AdSense, YouTube and plenty of other high profile assets, but it’s still bigger than that as well. So what is it then? It’s the largest venture capital firm in the world.
How can we make such a loaded statement you ask? The definition of venture capital as we understand it is the process of providing financial capital to startup companies in various stages that have a high-potential/high-risk profile. These startups generally hold a unique business model or novel technology. In addition, venture capital in itself is a subset of private equity.
Today the only “real” difference we see between VC firms and Google is that when a VC firm invests, they call it a “round of funding” and when Google does, its called an “acquisition.” Fine. Call it an acquisition or exploratory marshmallow renewable fuel research for all we care. At the end of the day it makes no difference. We rate Google a BUY because of the unique business model it operates in relation to its VC tendencies along with a few other interesting characteristics.
It’s a Numbers Game Few Can Play
VC firms primarily generate profits when they sell their portion of equity in a firm (AKA: When they make an exit). This means that most VC’s always have to simultaneously play defense when going on the offense because they operate with a limited pool of capital and long investment horizons. Google, on the other hand, holds a very distinct competitive advantage on this subject matter. What is it you ask? It’s called consistently positive free cash flow from unrelated operations. In essence, Google, like a starfish, has the ability to regenerate a lost appendage (cash) with a much lower level of risk than a VC firm.
When it comes to venture capital investing, it’s a game of numbers. The majority of investments will be “beautiful” flops, some will do all right and perhaps a couple will do unbelievably well. In layman’s terms, it’s a game of numbers and probabilities that this firm can play better than anyone else.
If one of Google’s acquisitions or internal developments blows up, the damage inflicted on average will be far lower than if it occurs at a VC. For this reason, Google doesn’t need to attempt a cherry picking strategy given that it doesn’t solely depend on new investments being successful to generate a profit. In our view, owning Google is like getting to have the best of both worlds.
Where’s the Proof?
Now at this point somebody, perhaps you, is reading this and saying “Google isn’t a VC firm for reasons X, Y, and Z.” We respect your opinion but consider the fact that over the last 10 and half years Google has acquired 99 companies according to our research. That would come out to one company roughly every two months (rounding down). That’s a lot of transaction action in our view and a far greater amount than many would expect for any publicly traded company, even if it is the tech space.
Why It Gives Google Shareholder’s a Unique Position
Unless you are extremely wealthy, there is no way you’re going to get in on some of the “best” startups. Even if you are extremely wealthy and well connected, that still doesn’t guarantee that you’ll be able to deploy capital into the “best” startups -- not when you’re potentially competing for a firm that Google also has an interest in as well. Without question the firm has a celebrity A-list lineup for the startup world. Some recent high profile acquisitions include such as Admeld, Admob, Punchd, and Zynga (ZYNG) (Partial investment and now going public).
In our view any shareholder of Google essentially has their stake pooled with some of the most brilliant minds on the planet that are also searching for next big hit. When someone buys a share of Google, they aren’t gaining exposure to the top search engine, they’re buying top talent, a proven track record of success and perhaps the next big thing that is shut out to 98% of investors around the world.
Dodging a Microsoft Destiny
Microsoft (MSFT) has been range bound for the last 10 years and counting. What happened here you ask? Essentially they drank too much of their own Kool-Aid and forgot for too long that what made them great was their ability to innovate and push into new spaces. By the time things really got out of hand and Microsoft management realized it, the firm went from being a growth stock to a cash cow.
Despite new successful pushes such as X-Box, it has done very little for the stock price. Google, on the other hand, understands that in order to keep the firm growing and investors happy, they need to keep trying to wow the world despite their current level of success. This helps explains their venture capital-like strategy and why we continue to like the name at such lofty price levels.
Call to Action:
For the everyday investor, Google’s venture capital acquisition strategy offers some level of access to a world that few could ever dream up relative to catching the next big hit. Combine this unique feature with Google’s stellar business model and this is what makes Google a BUY long-term buy in our view.