I was busy yesterday and not paying attention to Techmeme, the stock market, or my portfolio (always a bad idea), and saw this twitter post by Christopher Finke:
Being glad that I didn't buy GOOG like @fredwilson did. Down 36 points so far today.
Down 36 day one, ugh. Typical trade for me. The way to make money in the stock market is to sell to me or buy from me. I am not kidding.
So last night, while watching the debate, I spent some time on Techmeme making sense of the Google news. Turns out comScore, a company I am on the board of, released some numbers on Google's paid click growth, or lack thereof. Comscore data shows that the number of paid clicks on Google's network was flat December to January. For a company that has been growing like a weed for years, a flat month is never good news.
So am I concerned? Did I just buy a stock that is going to be cut in half in the coming months?
Who knows? The market is going to do what it's going to do. But I stick by my Covestor post. I like to think of stocks as proxies for buying companies. If someone was willing to hand you all of Google in return for paying them the next 10 years of its cash flow, would you do that? I would, for sure. (That's a theoretical exercise of course, as not many people can just show up with $150bn.)
I did a back of the envelope calculation that says if Google grows its operating cash flow at 15% per year for the next 10 years, then at today's price, you can own the company for the next 10 years of cash flow.
Well, what if paid search doesn't grow any more? First, I don't think paid search has suddenly stopped growing. It's growth is slowing for sure, driven by multiple factors. I don't think a slowing economy is one of them because in a tough economy, marketers move marketing dollars to high ROI channels like paid search. I do think many keywords have been bid up to a price that it's hard to get an ROI on them. And I do think Google is cracking down on click fraud, which is showing up in the total number of paid clicks. And that's a very good thing in the long run.
But the bigger story on Google is that it has been a one trick pony for years. Everything that Google does is paid for by its paid search business. In the fourth quarter, Google generated $2.9bn of gross profit (gross margin) and $1.7bn of operating cash flow. That means it spent $1.2bn on operating expenses. I bet that only $200-300mm of those operating expenses had anything to do with paid search. So if that's true (and it's a wild eyed guess), then Google is spending close to a billion dollars a quarter on stuff that is not producing revenue right now.
Do you think that stuff will never produce revenue for Google? Maps and other local services are going to be a huge revenue stream at some point for Google. Same with Google Apps, which is slowly but surely becoming a better alternative to Microsoft Office, a franchise that spits out billions of dollars of cash flow to Microsoft right now. I could name a few more lines of business at Google that today are total cost centers, but will not always be.
It's hard to figure out how to value these opportunities - so Wall Street doesn't. But that doesn't mean we shouldn't. If Google drops in half from today's prices, I'll be buying it all the way down.
Disclosure: Long GOOG