I have yet to release my review of Google's most recent quarter earnings results, but thus far I've seen nothing that would materially sway me from the conclusions drawn from the last set of forensic valuations released to subscribers (Google Q2 2013 Update: Valuing Possibly The Most Powerful Co. In The World?). One question that I am getting is "Did Google overpay for its Motorola acquisistion?"
Quick answer, I seriously do not think so. Please understand, the Wall Street fee/commission churning machine along with the tabloid financial media which has to churn content for advertising eyeballs has taught many (if not most) to view the investment world one fiscal quarter at a time. This is not a prudent, not sustainable model for building long term success. One of the most admirable traits of Google's management is their proclivity to think longer term, and to plan and invest accordingly.
Below are excerpts from the big Google report that I put out two years ago. It outlines the acquisitions that Google had made to date. Among these acquisitions are investments that the financial media and the sell side analytical community swore were overpriced because they actually ate their own BS sandwiches, literally convincing themselves that one quarter at a time is the way to run a business poised to take over an industry.
Three examples come to mind also happen to be three of the largest acquisitions - YouTube, AdMob and Android. Were they worth it? What single company controls and/or leads in internet video content distribution, computing OS (not just mobile OS, but all computing OSs), and mobile advertising? All three of these acquisitions amounted to less than $5 billion and for that amount and additional investment, Google literally and absolutely dominates each and every one of those industries.
Google Final Report Sep 29 Page 53Google Final Report Sep 29 Page 53 copyGoogle Final Report Sep 29 Page 54Google Final Report Sep 29 Page 54 copy
Compare and contrast this to the Microsoft/Apple/Blackberry consortium that paid $4.5 billion for 6,000 telecomm related patents from Nortel. These companies are ALL currently lagging in growth and reach compared to Google, even if you just consider this one investment or if you look at their entire enterprise. The reason? Google's management is considerably more entrepenurial and are more adventurous at risk taking.
Google purchased Motorola for its cell industry patents for protection of its Android OS. Everything else that came with the deal was gravy. Factoring the handset/hardware biz, the set top box biz (recently sold) and the patents, the patents were purchased extremely cheap (17,000 of them) compared to what the RIMM/MSFT/Apple consortium paid for the Nortel patents ($4.5B for 6,000 patents). Even with the patent value significantly downgraded, it's still was a better deal than its competitors. Motorola can now be used to directly drive down the cost of hardware and hardware profit margins.
|Motorola sales price||in billions|
|Sale of Set Top Division||$2.35|
|7 years tax loss carryforward||$5.60|
|2012 Motorola Mobility US NOL||$1.00|
|2012 Motorola Mobility Foreign NOL||$0.70|
|Net Purchase Cost for 17,000 patents & Motorola Mobility handset business||$(2.85)|
|Cost per patent||$167,647||This is a rough estimation to use as a gauge. Each patent is different, of course!|
|Recent Microsoft Rulling against Google demands $1.8M annual licensing fee for 2 patents.|
|Using this ruling, which was widely considered a loss of Google, we get the following ANNUAL yield on investment||537%|
|One must realize that Google Purchased 17,000 patents and the first cell phone manufactuer as well as one of the top tier manufacturers for nearly half of the their competition paid for just 6000 patents - RIMM/MSFT/Apple consortium paid $4.5 B for 6,000 Nortel patents.|
|Google will use the Motorola Mobility unit to further push down smartphone margins and costs instead of using it to make more profitable phones. Remember, Google is in the data business, not the smartphone business. The more people that have smartphones at any cost, the more money Google makes.|
One of the reasons why I think Google's missing of the mean analysts forcasts this quarter is not that big a deal is the extremely value rich product pipeline of product's nearing launch. As a beta tester and early explorer of Google Glass, I'm convinced that Microsoft, Blackberry and Apple have absolutely nothing to compare. Expect Google to expand its advantage over these companies materially over the next fiscal year.
Here I present...
Glass for the Hospitality Industry
Glass for Real Estate
Subscribers, click the following links for my updated price targets on Google (click here to subscribe) and read Google Q2 2013 Update: Valuing Possibly The Most Powerful Co. In The World?:
- Google Q1 2013 Valuation Note - Retail
- Google Q1 2013 Valuation Note - Professional & Institutional
The biggest risks to these price points are:
- A market that's being levitated by central bank magicians running short on magic spells...
- Regulatory pressure, which I feel is quite material and inevitable, but will not be a major factor in the near term.