If we were to think of a company that has the ability and enthusiasm to pursue moon-shot ideas and execute on them, then the instant name that would pop up in our minds would be Google (GOOG).
This internet search giant has diversified and transformed itself into a behemoth that reaches and appeals to almost every aspect of human life. Besides the popular glass project, Google is also venturing into robotics and transhumanism, distant ideas that might turn out to be commercially non-viable. However, for Google, the objective is quite clear i.e using technology to improve human life in any way possible.
The stock split and its implications
Recently, the media has been preoccupied with the story of Google's unconventional stock split that has been termed as shareholder-unfriendly by some, while others have called it a highly beneficial long-term move. Let me spell out the details of this stock-split quite briefly here:
The Google management has decided to create a new class of non-voting shares called as Class C shares, and holders of Class A and Class B shares as of 27th of March will get 1:1 ratio on their holdings on the second day of April. This means, that without diluting their holdings, the core management i.e Larry Page, Sergey Brin and Eric Schmidt have increased the number of outstanding shares, which would be helpful in providing for stock-based compensation and stock-driven acquisitions. While a lot more details on the stock split can be found here, let us take a moment to ponder the implications of this stock split on existing and prospective shareholders.
Firstly, it is important to understand that in the current shareholding structure scenario, the management trio holds a majority of the Class B shares, which carries approximately ten times the voting power of Class A shares. Thus, the new Class C shares would be not tantamount to a huge loss of power, as it has hitherto been retained by the founders and the management. Thus, the outcry over the non-voting feature is a bit misleading, given the fact that it is more of a build-up on the existing structure.
Also, the said stock split carries the clause that, "if the average price of the Class C stock is at least 1 percent below the Class A shares during the first year after the split, then Google will have to pay class C shareholders". Well, this will safeguard the Class C shareholders from any aggressive market activity that could affect the stock price. In a way, Google has cleverly convinced the shareholders of maintaining the price of Class C shares that could see reasonable volatility because of its non-voting nature and high valuation after the split.
Larry page and Sergey Brin have showed their flawless mettle at managing Google to make it into the colossus that it is today. Hence, if they retain the control, then it could prove to be massively beneficial in the long-run for the shareholders. Since the management will be able to function with least interference from various stakeholders, they would be able to take bold and apt decisions for steering the company to further prosperity.
Therefore, in my opinion, the prospective shareholders who are thinking of investing in Google should take leverage of this stock split. Since the existing shareholders do not enjoy considerable voting power, there is a lesser probability that the price of Class C shares will be trading at a sizeable discount to the price of Class A shares. Thus, if you are investing with a long-term horizon, then the impact of this stock split would be minimal on your overall returns.
How goes the business?
The recently announced results for the fourth quarter saw a top-line growth of 17% y-o-y to $16.9 billion, of which the Google segment contributed approximately 93%. Though the cost-per-click was down 11% y-o-y, the aggregate paid clicks growth was strong enough at around 31% on a year-over-year basis. Besides the core revenue growth, the other revenue almost doubled from the last year. The primary component of this other revenue is the sales generated from app sales and other content on the Playstore. In terms of results, Google has fared quite well in keeping with the rise of social media giant Facebook (FB).
The social giant Facebook has been doing considerable rounds in the media because of its acquisition of WhatsApp for a sum of $19 billion. Since a lot of analysis and interpretation has already been done by various Wall Street analysts, it would not be useful to take that road. Rather, the implications of this massive deal on Google would be an interesting point, given the fact that there have been considerable rumors regarding Google making a bid for the messaging service, WhatsApp. Though such claims have been rubbished by the management of Google, the analysts certainly believe that this deal will affect Google's operations in the long run.
Based on the current user base of WhatsApp with the fact that it is adding approximately a million users per day, Facebook will have an explosive data mine within the next two years. I agree that Facebook will not monetize WhatsApp, but in the world of digital advertising, a huge user base is like the touchstone that can turn things to gold. Thus, if Facebook, which has already climbed to a distant second after Google in terms of advertising market share, can find out ways of leveraging its database, then it would be a reasonable threat to Google in terms of maintaining its current market share.
While Facebook is a big threat to Google in the advertising space, I believe that the latter is making giant leaps forward in terms of offering value propositions to the clients. One of my biggest bets is Youtube, as it has the potential to occupy a big chunk of an advertiser's portfolio. This video streaming service has over 1 billion viewers per month and saw a 50% increase in daily watch time last year. As Nikesh Arora, Chief Business Officer of Google, rightly pointed out, digital marketing on Youtube is much more than transplanting television ads. Youtube engages with its customers in a more creative way, and a testimony to that hypothesis is the fact that in the last year, three videos by brand marketers were on Youtube's list of top ten videos of 2013.
In conclusion, it can be said that while Google is experimenting with moon-shot ideas that might not be absolutely viable from a commerce viewpoint, it is still a search kingpin and is strengthening its presence in display platform. As already mentioned, the stock split would not have a big impact on the share price with the expected post-split price being to the left of $1100. Thus, at this point in time, investors have a couple of probable choices:
Put money into the company now and be awarded a Class C share for every share after the split. Since the stock-split would not have a bearing on the performance of the company, it could be a good strategy.
An alternative to the above is waiting for the split to happen and monitoring the behavior of stock price post that event. As it is probable that the price would fall for both the classes of shares, it could then present a suitable buying opportunity.
Disclosure: I am long GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.