Seeking Alpha

Google reportedly committing up to $500M to challenge Amazon

  • Google (GOOG -0.2%) has set aside up to $500M to bring its Shopping Express local/same-day delivery service nationwide, re/code reports.
  • Google hasn't confirmed the number,  but is open about its willingness to spend heavily on Shopping Express. "You can very much expect that we are putting a lot of money into this" says exec Tom Fallows.
  • Last month, Google expanded Shopping Express' reach to include overnight delivery for the whole of Northern California. Fallows says Google hasn't settled on pricing for the service, but says a sub-$100/year price wouldn't be surprising.
  • Amazon (AMZN -1.2%) charges $299/year for its Prime Fresh same-day service (currently in 3 cities, includes groceries). It also offers standard Prime subs in 12 cities same-day delivery for some products for a $5.99 flat fee.
  • Whereas Google is relying on retail partners such as Target, Whole Foods, and Staples to handle warehousing - Google's trucks pick items up from stores for delivery - Amazon is opting for a go-it-alone approach that's initially more costly/time-consuming, but could also be more efficient over the long run.
  • Among Google's apparent goals: Boosting sales of product listing ads by (in Fallows' words) "closing the loop on locally available items," and obtaining data on consumer buying activity that could be later offered to marketers,
  • Google and Amazon already have a growing ad rivalry. Amazon, whose users are more likely to go directly to its site/apps to place an order (and thus bypass Google) than other online retailers, is stepping up its efforts to use its mountains of customer data to deliver targeted ads. Google, meanwhile, is expanding its arsenal of tools and services for e-commerce firms.
  • eBay, meanwhile, is backtracking on plans to aggressively expand its Now same-day service.
Comments (25)
  • Dantes_Will
    , contributor
    Comments (379) | Send Message
     
    Innovation is great, but Google and Amazon are spreading themselves thin with too many money burning side projects that will not be profitable in this decade. And many of these side projects provide little to no synergy to their core business.

     

    All it takes is a slight decline in your core business and all of a sudden, these side projects turn from "future potential" into cash burning & margin killing tumors that will need to be divested.

     

    This is a lesson well learned from other tech giants like Cisco & IBM that suffered a downturn in their core business, & were forced to divest much of their non core business projects & assets without ever realizing any profits or benefits.
    7 Jul 2014, 11:58 AM Reply Like
  • Zipper0
    , contributor
    Comments (1042) | Send Message
     
    I agree. Google's theme these days seem to be, "Let's take literally all our profits from our high-margin, low-capex core search business and waste them on every single low-margin, high-capex 'moonshot' business we can imagine."

     

    There really is no point in having a high-margin, low-capex core search business if, at the end of the day, literally all the profits from that business are being diverted to far inferior low-margin, high-capex businesses in the vein of Amazon, namely cloud computing and Shopping Express. This year, Google's capex on cloud computing alone will hit $12 bil., which basically consumes ALL of Google's net income for 2014. Cloud computing is a commodity business and is the antithesis of Google's core monopoly search business in terms of margins and capex requirements. Never underestimate the ability of so-called geniuses to cut their own throats.
    7 Jul 2014, 12:13 PM Reply Like
  • idkmybffjill
    , contributor
    Comments (1706) | Send Message
     
    At least Google has a lot of profits - AMZN definitely faces the issue of having trouble if their core business ever declines. At least they do have some cash on the BS.
    7 Jul 2014, 12:28 PM Reply Like
  • ReligiousWacko
    , contributor
    Comments (1336) | Send Message
     
    The thing you have to consider is that GOOG management is already filthy rich. Now their main goal is to keep doing something interesting .. milking profits out of search is not enough.

     

    I assume you didn't expect them to consider shareholders return to be their primary goal?

     

    And of course AMZN is going to get screwed ....
    7 Jul 2014, 12:58 PM Reply Like
  • racchole
    , contributor
    Comments (363) | Send Message
     
    As a supporter of freedom and progress, I implore these companies to push innovation towards undiscovered frontiers.

     

    It makes little sense that we would discourage a company from "wasting money" on "low-margin, high capex moonshots". This is exactly what we need our enterprises to be doing. This is the very definition of progress. Who else is going to discover the next big thing, if not Google or similar company with excessive cash?

     

    You don't like it, don't own the stock. It speaks volumes about what you consider a "priority" when you write negatively about research and development efforts towards new and undiscovered technologies. You might want to take a break from (insert distraction here) and notice that there is an infinite chasm of scientific possibility beyond the iPhone.
    7 Jul 2014, 12:59 PM Reply Like
  • Dantes_Will
    , contributor
    Comments (379) | Send Message
     
    racchole - You're talking about different things here. If you are speaking for the good of US innovation and just want to support 'merica, then grab an index fund or buy some BDC's. The rest of us are talking specifically about GOOG stock as an investment.
    7 Jul 2014, 01:53 PM Reply Like
  • sid18
    , contributor
    Comments (333) | Send Message
     
    "Never underestimate the ability of so-called geniuses to cut their own throats."

     

    Love it.
    7 Jul 2014, 05:53 PM Reply Like
  • Anyoption
    , contributor
    Comments (649) | Send Message
     
    Dantes_Will, you're spot on. Steve Jobs told Google CEOs that they're doing too much, and he was right. The same goes for Amazon, whose charitable profit margins are going to eventually catch up with them
    7 Jul 2014, 07:00 PM Reply Like
  • Shaduc
    , contributor
    Comments (1784) | Send Message
     
    "Steve Jobs told Google CEOs that they're doing too much, and he was right."

     

    It is very apparent that the Google twins want to give back to the USA. Also the company has to diversify, as AAPL's fluctuation from 2012-the recovery has indicated.

     

    Google went into Motorola Mobility focused for 2 years (as those employees only had 2 year contracts) and further developed its strengths and left the commodity business to focus on profitable ventures.

     

    In all truth, the IPOD 4th generation was perfection with the price point, the IPhone and the IPAD weren't or aren't.

     

    Innovation through focused delivery that is what Xerox PARC lacked the purpose for its R&D. Therefore Apple was able to monitize that ...
    7 Jul 2014, 08:46 PM Reply Like
  • Shaduc
    , contributor
    Comments (1784) | Send Message
     
    "Steve Jobs told Google CEOs that they're doing too much, and he was right."

     

    It is very apparent that the Google twins want to give back to the USA. Also the company has to diversify, as AAPL's fluctuation from 2012-the recovery has indicated.

     

    Google went into Motorola Mobility focused for 2 years (as those employees only had 2 year contracts) and further developed its strengths and left the commodity business to focus on profitable ventures.

     

    In all truth, the IPOD 4th generation was perfection with the price point, the IPhone and the IPAD weren't or aren't.

     

    Innovation through focused delivery that is what Xerox PARC lacked the purpose for its R&D. Therefore Apple was able to monitize that ...
    7 Jul 2014, 08:46 PM Reply Like
  • racchole
    , contributor
    Comments (363) | Send Message
     
    Dantes - I am specifically talking about companies (i.e. Google) using money on risky ventures. I support this as an American and as a shareholder.
    8 Jul 2014, 12:08 PM Reply Like
  • Budavar
    , contributor
    Comments (1387) | Send Message
     
    What cash?
    Losses, like in upcoming Q earnings report!
    11 Jul 2014, 03:16 AM Reply Like
  • Budavar
    , contributor
    Comments (1387) | Send Message
     
    Already, the losses are already catching up with AMZN =
    a terrible investment so far in 2014 =

     

    DOWN in an UP market.

     

    With a fair value of $10, repeat $10 == AMZN is vulnerable.

     

    Apply the 15 to 16 PER of the average Dow stock to
    AMZN's minuscule $0.59 EPS for last year

     

    (a LOSS for 2014 = certainly in the upcoming Q report
    if managements warning is to be believed) =

     

    you get to that pesky fair value for AMZN =
    >>>>> $10, repeat $10.

     

    The worst is likely coming SOON.
    11 Jul 2014, 03:23 AM Reply Like
  • idkmybffjill
    , contributor
    Comments (1706) | Send Message
     
    As of March 31st, 2014, AMZN has over $5B in cash and 3.5B in short-term investments.
    11 Jul 2014, 10:40 PM Reply Like
  • heyo
    , contributor
    Comments (61) | Send Message
     
    google has 60billion $ in cash (around), I think they will be fine
    7 Jul 2014, 12:28 PM Reply Like
  • Zipper0
    , contributor
    Comments (1042) | Send Message
     
    All that cash is from Google's core search business, and when they dump it on wasteful projects like cloud computing with 1-2% margins vs. search which has 35% margins, it's as if the monopoly search business never even had existed in the first place. The test of management's competence is what they do with their retained earnings/cash on the balance sheet, and when they waste it massively on moonshoots with far inferior financial characteristics than search, shareholders will never see a dime of those glorious monopoly search profits and Google's glorious search business will all have been for nought. When 35% profits margins get funneled into 1-2% margin businesses like cloud and Shopping Express, Google's ultimate profit margin is 1-2%, not 35%.
    7 Jul 2014, 01:04 PM Reply Like
  • Left Banker
    , contributor
    Comments (2282) | Send Message
     
    Only takes the odd winner: See youtube. You were probably overwrought with negativity when google spent, what was it? $1B? that's what I recall anyway, on youtube. Check out what that gigabuck has produced.

     

    The guys running google are smart, very smart. There will be losers and winners, but all it takes is a few big winners along the line. I'm with them for the long - very long - term.
    7 Jul 2014, 02:22 PM Reply Like
  • ReligiousWacko
    , contributor
    Comments (1336) | Send Message
     
    Left: how profitable is youTube? GOOG financials don't break out youtube?
    7 Jul 2014, 03:49 PM Reply Like
  • Left Banker
    , contributor
    Comments (2282) | Send Message
     
    Ok. I did a quickie search. Youtube cost google $1.6 Gigabucks in 2006.

     

    "The Google-owned video service is expected to record $5.6 billion in gross revenue this year, according to estimates from eMarketer. That's up 51% from last year and would equate to 11% of Google's total ad revenues.

     

    "For context, that's ... 6.3% of all of Google's net U.S. ad revenues for the year... 20.5% of the $4.15 billion U.S. online video ad market.

     

    "Google doesn't release YouTube's revenue figures or break them out in public filings, so take eMarketer's numbers for what they are, an estimate based on studies conducted by other research firms, investment banks, its own analysis and interviews with marketers."

     

    from AdAge: http://bit.ly/1j9pXd9
    7 Jul 2014, 04:53 PM Reply Like
  • Ian Farbrother
    , contributor
    Comments (216) | Send Message
     
    While a *basic* cloud platform will inevitably be low margin, I would be very surprised if Google didn't start providing value-added services that distinguish its cloud. The first one that comes to mind is providing access to the tons of 'big data' that it inevitably gathers via its search engine (and other projects). Could be very profitable and synergistic.
    7 Jul 2014, 05:27 PM Reply Like
  • racchole
    , contributor
    Comments (363) | Send Message
     
    Again - I say this as a human supporting progress and as a shareholder.

     

    It is possible Google has a strategy that does not include building an infinite cash position, and has a focus towards changing the world. There are not many companies with market caps nearing $400b. Suffice to say, GOOG is in a league of its own, and the company strategy simply cannot be compared to others whose main interest is growth.

     

    I am still not understanding why anyone would speak negatively of a company for taking expensive risks. If you own the shares and don't like the management's use of cash, sell the stock. Most companies do behave in the best interest of the bottom-line/shareholder return. Google does this, and more.

     

    A shareholder needs to be in line with the company in order to feel good about an investment. Google is pioneering our future and we should all (American and non-American alike) be grateful.
    8 Jul 2014, 12:18 PM Reply Like
  • TreborMac
    , contributor
    Comment (1) | Send Message
     
    This is a really interesting discussion. Ultimately it's about whether we trust the 'smart' people at Google to continue to deliver strong cashflows and high margins from diversifications or as as Peter Lynch called it - "diworsification". The risk is that Google's management spend the cashflow on low margin capital investment projects that consume cash rather than return surplus cash back to shareholders. The key question as Ian above has mooted is whether Google have got 'something up their sleeve' about whether they can provide value-added services over the top of low-margin commodity services such as cloud computing. Perhaps they have or can which depends on their vision of the future and Google's role in society. But as investors I think we must always be aware for the potential of management to want to build empires and burn cash by going down the much-travelled road of diworsifications!
    8 Jul 2014, 07:33 AM Reply Like
  • hksche2000
    , contributor
    Comments (986) | Send Message
     
    I see GOOG facing AMZN in the lion's den as an attempt to take the fight to its (perceived) most threatening competitor. Shopping Express just happens to be used as the spear head. However, the real battle between the titans is not about food, it's about dominance in everything cyber and consumer. Cash rich GOOG currently seems to be the better positioned favorite here over lossmaking AMZN, but never underestimate Bezos.

     

    An even greater competition will start when BABA and BIDU will join the fray.
    8 Jul 2014, 12:12 PM Reply Like
  • Budavar
    , contributor
    Comments (1387) | Send Message
     
    "Never underestimate Bezos".

     

    Really?

     

    As the loss leader he has been over-estimated for 20 years.
    11 Jul 2014, 03:28 AM Reply Like
  • hksche2000
    , contributor
    Comments (986) | Send Message
     
    AMZN's (ridiculously overvalued) NAV on Wall Street is all a reflection of "In Bezos we Trust". What else is there to justify a P/E of 540 in a consistently loss making company?! So, don't underestimate JB and his sway over his believers on WS! Just don't get sucked into the hype yourself.
    11 Jul 2014, 07:38 PM Reply Like
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