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Did Reggie Middleton's BoomBustBlog Best Wall Street's Best of the Best In Guaging The True Value of Google? We Have To Think More Like An Entrepeneur & Less Like A Wall Street Analyst
First of all, congratulations to all BoomBustBlog subscribers that
have recieved windfall profits on their researched Google positions for
the second time in less than a calendar year. Google traded down to a 4
handle as recently as a couple of weeks ago and the January 880 calls
(which I kept in inventory) were trading as cheap as 5 cents each. As I
type this, those same options last traded at $1.40 each (now down to
1.05)- that's a 21x-26x return!
Google's latest
quartelry results should lead many - if not most - to believe Reggie
Middleton and his team at the BoomBust bests ALL of Wall Street's sell
side research. For previous examples (a lot of the), reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?
It
is now well known that Google has once again knocked the ball out of
park with their performance. Those who follow my blog know that I have
been bullish on Google since the spring/summer of last year,
with signfiicant profits being taken along the way. Many on the Street
have turned rather negative on Google despite some of the most positive
results and promising actions of its history, and in the industry! Why
is that? How did I see so much value in Google while the Street was
remiss, only to be taken totally and utterly by surprise? Let's take a
historical traipse of my take on Google, but first we peruse the "short
term-ities", looking forward only three months at at time mentality of
Wall Street to ascertain why only Reggie Middleton's BoomBustBlog
screamed on the The Gross Misvaluation of Google. [Subscribers, please follow along with the subscription documents - Google Q1 2011 earnings review - Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google and the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).]

Larry
Page did an excellent job on his first full debut performance as
Google's new CEO during the conference call. One of his most important
accomplishments? Convince the Wall Street crowd to realistically look at
value creation and look away from short term, quarterly
this-and-that-itis. A true high growth company is willing to sacrifice
some margin to grow the business. This is Page on one of the most recent
ventures, Google+:
I see more opportunities for
Google today than ever before, because, believe it or not, we are still
in the very early stages of what we want to do. Even in search, which we
have been working on for 12 years, there has never been more important
changes to make. They said there is no money to be made in search over
and above a bit of banner advertising. Most new Internet businesses have
had that same criticism. Fast-forward to today. It feels like we are
watching the same movie again in slow motion. We have tremendous new
businesses being viewed as crazy — Android. And actually have a new
metric to report in Android of 550,000 phones activated a day. That is a
huge number, even by Google’s standards. Chrome is the fastest growing
browser. We have over 160 million users. Now people rightly ask, how
will we monetize these businesses? Of course, I understand the need to
balance the short-term with the longer-term needs, because our revenues
and growth serve as the engine that funds our innovation. But our
emerging high usage products can generate huge new businesses for Google
in the long run, just like search. And we have tons of experience
monetizing successful products over time. Well-run technology businesses
with tremendous consumer usage make a lot of money over the long term.
Google+
is most likely a game changer and definitely has hurt those Goldman
clients who allowed the Squid to convince them to fork over all of that
money in a private offering, ex. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned! (more on that in a post later on today).
Google
is a very aggressive Internet investment company who just so happens to
operate its investments. Thus, it is a strategic acquirer. The problem
with that, and the reason that there was a "Gross Misvaluation of Google" is that the Street cannot fully appreciate strategic investment when their entire world is measured 3 months at a time!!! In reference to aggressive investment, Page said:
Overall,
we are focused on long-term, absolute profit and growth, as we have
always been. And I will continue the tight financial management we have
had in the last two years, even as we are making significant investments
in our future. I would like to finish on our people. Great companies
are no greater than the efforts and ingenuity of their people. We are
continuing to hire the best. Keeping them happy and well-rewarded is
crucial to our future. Many of you will be interested in hiring, whether
we hired a few hundred more or less than you expected this quarter. But
we will optimize headcount for the long term and the opportunities we
see. It’s easy to focus on things that we do that are speculative, e.g.,
driverless cars. But we spend the vast majority of our resources on the
core products. We may have a few small speculative projects happening
at any given time, but we are very careful stewards of shareholder
money. We are not betting the farm on this stuff.
Has Google given investors a reason to believe in Page's diatribe?
Reference the BoomBustBlog post, A Realistic Look At The Success Of Google's Investment History
As
promised, I am presenting historical justification of the logic behind
my call of absurdity in the drastic drop in share price after Google
announces a redoubled effort in investment and marketing of its nascent
businesses. I went into the logic in detail via our Google Q1 2011
earnings review - Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google. The following pages are excerpted the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).
To
begin with, Google apparently realized early on that it could better
realize returns by investing shareholder capital through acquisitions.
It has actually been quite acquisitive, making 88 purchases over the
last 13 year. Last year was Google's most acquisitive year, ever!
While
many of the referenced acquisitions have been to bolster existing
products, several have literally become home runs - rising to the top of
their respective categories and even threatening to go farther in that
hey have the distinct potential to creatively destroy the status quo of
several multi-billion dollar industries. Let's walk through a sampling.
Doubleclick + Youtube + Google TV (organically grown)
This
combination is probably the closest thing to a direct replacement for
TV as we know it. Even if Google TV does not succeed, YouTube is
currently the most watched video site, by far and Doubleclick (for
monetization, along with adsense style ads) is the 2nd largest display
ad entity. Again, the potential to reconfigure the TV industry. Google
is already seed funding original content and cutting licensing
(streaming rental) deals with the large established studios. The ability
to threaten TV as we know it was purchased for just over $1 billion. A
pretty good investment, no? Would the NY Times parent co., Fox, Disney,
NBC/Universal have considered this a wise purchase?
Admob and Android
For
a mere $250 million (plus ongoing support and development costs and
investments), Google now commands the largest global footprint of mobile
phone OS, the fastest global mobile phone OS growth rate, the largest
(by a very, very wide margin) mobile ad presence, and inarguably the
most disruptive force in mobile computing. What tech, media, telecomm or
strategic investment company would NOT by the Android/Admob combo now
for 10xor eve 15x what Google paid for it? Microsoft, Nokia, Apple,
Samsung, LG, RIM, Oracle, IBM, HP, anyone???
The list of
strategic acquisitions that have paid off in spades goes on, as well as
the requisite flops that go along with a high volume strategy.
So,
assuming that Google has done a good job at spending its shareholder's
money and sprouting several billion dollar businesses to assist in the
diversification away from pure web search advertising - and realizing
that last year was Google's most acquisitive to date, and realizing that
Google is dumping more money into research, marketing, headcount and
acquisitions now than in any time in its existence (including last
year), should you be bullish on the stock? Three or four more Androids,
YouTubes, Admobs and Doubleclicks to disruptively take over 5 or six
more multi-billion dollar industries is a reason to lop 15% off of this
stocks price (which currently barely accounts for just the search engine
potential)???
As excerpted from Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google:
For the quarter ended March 31, 2011 Google reported gross revenues (before traffic acquisition costs) of $8.58bn, an YoY increase of 26.6% and QoQ increase of 1.6% while net revenues (after traffic acquisition costs) increased 29.1% YoY and by 2.6% sequentially to $6.54bn. The
YoY growth in gross and net revenues was the highest at least since
2008 demonstrating a increasingly momentum in the growth of Google’s
digital ecosystem. The increase in net revenues (after TAC) was
actually stronger than the increase in gross revenues, indicating that
Google has not only packed in growth but lowered aggregate top line
expenses.
However, despite a strong set of results the
stock took a severe beating and was down c8% as the results were short
of analyst expectations. The market’s reaction to Google’s numbers
clearly reflects the very myopic view of US public markets
wherein a stock is dumped if it fails to beat consensus – even when this
view clearly overlooks the broader picture.
Google’s adjusted earnings came in at $8.08 a share below the $8.17 expected by the markets. However,
a closer look at the results reveals that the perceived shortcoming was
not a result of a revenue miss or margin compression but on account of
Google’s entrepreneurial (and quite applaudable – at least from this
investor’s perspective) endeavor to invest heavily in future projects.
The miss was principally due to higher research and development expenses
as the company continues to invest in new emerging businesses
like Display, Mobile and Enterprise. Research and development expenses
(including stock based compensation expenses) grew 50% YoY to $1.2bn and
was 14.3% of gross revenues in Q1 2011 vs. 12.5% in Q4 and 12.1% in Q1
2O10. Had research and development expenses at 12.5% of gross
revenues, the earnings would have been $8.51 per share, a clear beat to
consensus and stock would have seen a roller coaster ride –
despite the fact that future prospects would have been a fraction of
that they are now due to lower investment in the future. Google has
proven that their investments yield superior returns to that of cash
holdings, ex. Youtube, Android, Admob, Google Voice, Teracent, etc.
Instead, the stock was pushed down 8% as the shorter term players in the
market reacted. Players such as sell side analysts whose employers
benefit from the shorter horizon churning of stocks vs. a longer horizon
and outlook, and traders who act on price movement and not value,
were(are) clearly tangled between web of OPEX (ongoing cost for running a product, business, or system) and CAPEX (expenditures creating future benefits).
You
see, the Street has become so accustomed to playing the earnings
management game with their favored companies that most of them have
actually lost the ability to ascetain true value outside of quarterly
accounting earnings! Case in point - Apple's valuation
As excerpted from
Yes, we are more optimistic on Apples' earnings than the sell side (reference page 16 in subscription document
Apple - Competition and Cost Structure) Look to my writings from last summer to determine the common sense reasons why: How
Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall
Street Will Enable This Without Sheeple Investor’s Having a Clue.
No,
Google is not in the mobile space for search ads, it's looking to
become the next Microsoft with Android as the next Windows. It is
thinking big, simultaneously going after both the consumer and the
enterprise space with cloud-based software and services - and
advertising!
In the meantime, sheeple-like investors are being
hoodwinked by quarter after quarter of Apple blow out earnings. Don't
get me wrong. I feel and fully acknowledge that Apple is executing on
all 8 cylinders of a 6 cylinder engine, but it still has its real world
limitations. Apple will start to bump up against these limitation over
the next 4 quarters, and the signs of this bump are already apparent. Of
course, the signs are being handily masked by the games that Apple
management and the sell side analysts of Wall Street play, with the
"Sheeple" retail and the lazier component of the institutional investors
being put out to take the eventual bullet.
Riddle me this - If
Apple can consistently beat the estimates of your favorite analysts
quarter after quarter, after quarter - for 11 quarters straight,
shouldn't you fire said analysts for incompetency in lieu of celebrating
Apple's ability to surprise? After all, it is no longer a
surprise after the 11th consecutive occurrence, is it? I would be
surprised if my readers were surprised by an Apple surprise. Seriously!
Apple management consistently lowballs guidance to such an extent that
it can easily manage, no - actually create outperformance. This has has a
very positive effect on their valuation. Of course, I do not blame
Apple management for this, of they are charged with maximizing
shareholder return. The analytical community and the (sheeple) investors
which they serve is another matter though. Subscribers can download the
data that shows the blatant game being played between Apple and the
Sell Side here:
Apple Earnings Guidance Analysis. Those who need to subscribe can do so here.
Below,
I drilled down on the date and used a percentage difference view to
illustrate the improvement in P/E stemming from the earnings beats.
In
our analysis of Apple, we are using real world assumptions of future
performance derived from backing in to the low balling this company is
prone to. If you look at its history carefully you can gauge what
management is comfortable with, hence what they may be capable of on the
margin. Using these more realistic numbers, it is much more likely
Apple will deliver a miss in the upcoming quarters in its battle with
the Android! The following is the reason why...
{iframe weight="500" height="480" frameborder="1"}http://media.cnbc.com/i/CNBC/components/Syndicated%20Video%20Player/videomodule.swf?id=1618325359&pcode=cnbcplayershare&play=&base=http://plus.cnbc.com/stickers/partners/cnbcplayershare/{/iframe}
Of
course, this inability of the Street to see the forest for the trees
magically stops at the retail and insitutional customer. Once it comes
to its own accounts, the Street miraculously start's to agree with
Reggie's analysis... Miraculously! Reference: Goldman
Sells Nearly Half $Billion Of Apple Stock Directly Into Their Client's
Conviction Buy Recommendation: Guess Who Really Agrees With Reggie Now! and read very carefully!
Since I started covering mobile technology on BoomBustBlog,
things have pretty much occurred precsiely as we anticipated - with
Google, Microsoft, and Research and Motion (a 6x to 7x gain on select
puts) following their prescribed paths...
-
Blackberries Getting Blacked Out, Imitate Amateur Base Jumpers Sans Parachute!:
Google’s Android Market has more than 150,000, compared with more than
25,000 in BlackBerry App World. RIM fell $6.17, or 11 percent, to $50.43
in late trading yesterday, after closing at $56.59 on the ... Friday,
29 April 2011 -
BoomBustBlog Research Performs a RIM Job!:
...is innovating and growing, at the same time compressing marigns.
They also fail to understand the business model that Google has
innovatively adopted to push Android through vendors and 3rd party
distributors ... Friday, 17 June 2011
Next up is Apple,
whom we predicted our analysis would reach frutition in the 4 to 6
quarters. Apple reports today, and we fully suspect a blow quarter that
(again, just like the last 12 quarters) surprise the unsurprisingly
inept analyst estimates that somehow could not get it right for nearly 2
years straight see above). We also expect indications of our margin
compression thesis to start peeping their little eyes out of the
footnotes, of course to be totally ignored by the cheerleading sell side
of Wall Street and pop tech and financial media, as the Apple lovefest
marches on.
- advertisements -




A selection bias? How am I to tell?
Reggie,
A word in your ear Bud: stick to Banks and Sovereign debt, you're exceptionally good at it
Now regards your continued 'gushing' for Google let's have a quiet word:
Android - copy-cat, clunky and junky, also-ran version of Apples seminal iPhone
Chrome - er, never heard of it! Only joking, barely! Another also-ran, 2nd to MS Explorer
Google TV - copy-cat clunky also-ran version of NetFlix? ..or upcoming Apple TV
There's 3 core "future" Google products that share all the same characteristics: they're awesome also-rans. Put another way, Google is 'collecting crap' at a rapid rate
A big corporate that has gone from rising mega-star to maturing dinosaur. Goo are blowing their money away on a spread of also-ran products in every sector they bloat into. Reggie are you listening?
The key/core to Goo is search. Plenty of life far as i can see in that if you're happy with stagnent Ad revenues and market share growth. But they've added a sack-full of junk as all corporates do when fame goes to their head and they think they can repeat their market innovation and domination in every other market they've no expertise in. Goo thinks because they've the the 'magic touch' in Search it'll just happen/rub off in every otheer sector their egos can't resist wanting a piece of (Dream On)
As corporate and individual history teaches us lightening does not stricke twice. You get one throw of the dice and Google grabbed it like no other. But that's your lot. You can't buy your way into other sectors, you can't repeat your magic touch in markets you have no cutting edge in
Goo is now well into 'over-reach' territory. Mark my words this is the X-Factor Idol that's come a bit too far a bit too fast and now feels it 'essential' to carry 18 suitcases just for a short naughty weekend in Mexico (ie. Goo has passed young thrusting wannabe and reached full blown Diva stage)
"We may have a few small speculative projects happening at any given time, but we are very careful stewards of shareholder money. We are not betting the farm on this stuff."
Thank fuck for that! The Tesla for example is an absolute joke. Period. 3 times the weight of the Lotus Elise it's based on, twice the price, no driving range whatsoever and all you can do to enjoy your e-sportscar is go round and round and round in 35km cicles to your house (bored stiff yet, you will be!). The spirit of pure driving, being tethered to a post! Be humane Google and try to drown this endlessly delayed saloon at birth.
As for the "driverless car" project we have rocketed into Tek Giant 'Peak Dumb' territory, better known as Planet Uranus. Google is trying to replace the liquid super-intelligence of the human brain with the pre-programmed dot-dash dumb of a machine. Er, why?
Since when has the designed-in mechanical 'intelligence' of a toilet flush mechanism been more intelligent than the person flushing the toilet? You want to replace the human super-brain with dumb pre-programmed toilet flushes (computers) that have zero intelligence whatsoever? Are you total fuking retards?????
I thought it was IBM that could reach Big Corporate 'Peak Dumb' with favouring mainframes over PC's and now their equally moronic computerised traffic lights! Goo has joined the Mega-Moron ranks of Big Auto Co's thinking a driverless (ie. brainless) car is a step on the evolutionary ladder
"I would like to finish on our people. Great companies are no greater than the efforts and ingenuity of their people. We are continuing to hire the best."
Judging by your Tesla and driverless car teams what worries me more than hiring "the best" is your inability to fire your fuking morons.
Google is now a Diva carrying way too many suitcases (sacks of crap). Goo has been the fastest rising star in corporate history. It has also streaked into the Diva role too fast as well. If Google doesn't asset strip itself soon by jettonising all these suitcases, or someone raids them and does it for them, Google is heading to diseased dinosaur (see IBM and Microshite) in record historical time too (ie. the knackers yard)
Are you listening Reggie?
Do you always insert your name in the title line of your articles? Before I read this, how many videos of yourself are embedded? Is everything you write a self promotion?
You are obviously smart, but your audience here is not a bunch of turnips either. You can tone it down and still get credit for whatever you are raving about today.
OK, I read it.
Totals this time:
References to Reggie in the third person: 5
References to the blog: 7 (Not counting chart labels and letterhead).
Hey, no problem, a man has to make a living, but the bold type everywhere is a bit difficult to read.
Reggie's posting style and constant rehashing of old articles inside new articles reflects the love he has for the Taiwanese computer products he is such a fan boi for.
How is that Apple short doing Reggie?
yeah what's with the timing, right before apple reports...