Anand Sanwal

Does Google Have an Organic Growth Problem?

Interesting post and analysis by Citi and glad to see you guys picking up on it. We've benchmarked and analyzed the entire S&P 500 (of which Google is a member) on organic revenue generation and efficiency and our #s reveal a similar story, but the picture still is very positive.

In short, we would agree with Citi's analysis that the organic revenue as a % of total revenue for Google as well as a % of total revenue growth is declining over the longer period we studied. As compared to Yahoo (the closest comparable to Google if there is one), you can see however, that Google is destroying their peer from an organic revenue perspective.

Our analysis goes beyond just organic revenue and looks at the efficiency of generating this organic growth, e.g., how much are companies spending to achieve organic revenue growth. We call this efficiency ratio the Organic Growth Multiplier (OGM). The logic behind the OGM is that if one company can spend $1 to get $3 of revenue and another can spend $1 to get $5 of revenue, the latter company is healthier and has more momentum in its business and obviously superior organic revenue generation capabilities.

When we look at the OGM of Google versus Yahoo and versus the larger S&P500 tech financials category, the picture is actually quite pretty for Google. They're tops as it relates to OGM which means a dollar of their investment into their core business generates more revenue than the average tech sector company. They also outshine Yahoo on this count as well.

The indexed OGM for Yahoo and Google over the period from 2003-2007 are 50.9 and 312.84, respectively. Without getting into the quantitative models that underlie this, the point is that Google's organic revenue efficiency is far superior to Yahoo.

Lastly, we've seen that higher OGM and total shareholder return are positively correlated. So that that implies is that having the ability to generate organic growth efficiently is a good indicator of shareholder returns.

While the assertion that their organic revenue is declining does remain true, the news is not as dire as I've been reading elsewhere from those who've picked up on this post. Yes, if they can turn one of their acquisitions into a money maker, this will obviously supplement some of the organic revenue deceleration that might be evident in their historical core business, but on the whole Google is still a star when it comes to organic revenue generation and efficiency. The fact that Citi retains its buy rating despite the organic picture is testament to this.

A bit on the methodology.

There are some notable differences from the Citi analysis which despite the similar conclusions do make our analysis more robust.

1. We've looked at a more extensive time period (2003-2007)
2. We strip out market growth for each company. In essence, if the market is growing at 10% and your company grows at 10%, we don't give you credit for this. This is rising tide growth and is not due to management's actions and investments in the core business. Organic revenue, therefore, in our models is only the growth we can attribute to management's prowess (or lack thereof).
3. In our Organic Growth Multiplier, we also look at the efficiency of generating organic revenue by determining how much is spent by each company to achieve its organic revenue. This gives a truer sense for the efficiency of the company's organic revenue capabilities.

Thanks for the great post on organic growth - a topic not often discussed.

Regards,
Anand Sanwal
brilliont.com
Investile Dysfunction blog
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