No. of Recommendations: 6
<<If you want to have a good investment return, you will require higher sales per present user.>>
I would add one small refinement to that: higher sales per present user on a per-share basis.
They do make oceans of profit. It's possible that a lot of this could be used to drop share count a lot.
The proportionality is what matters here though. What is important is that advertising revenue must grow very considerably over the next decade if investors require a good return. If you don't have a model for how that is possible, then blind hope might not suffice.
It is true that buying back shares allows them to preserve their high margins (this is distinct from diverting earnings into low margin business as Alibaba did for example). However whilst Google is trading at a PE of 30 (an earnings yield of 3.3%) then, by definition, it cannot grow its earnings by more than 3.3% as a maximum bound. Think of their "variability" of growth from buybacks as ranging between 0% and 3.3% as a maximum boundary, and realistically the upper bound will be more like 1.5% given other things they want to do with their owner earnings. This 0-1.5% variability for EPS growth is more or less unimportant when we are wishing for 10%+ EPS growth as a whole and we require some of that 3.3% yield for buying competitors (whether supplementing its own earnings or killing them) to help with the advertising growth itself.
I should iterate the main idea that what is important for Google is to be able to grow its advertising revenue largely organically and avoid competitors taking attention (search time) away, as sutton pointed out, from its existing searches. I am more optimistic than most that this is possible, but those expecting a good return whilst also unsure about how advertising revenue-per-user can grow significantly should view that as a contradiction.
If Google traded at a PE of 10 it would much better for owners, as its buyback capacity would have the upper bound of 10% growth (say 5% in practice) growth in earnings instead of 1.5% as presently.
Google is very aware through - more so than most analysts based on most of the earnings calls - that its advertising business, however, isn't something that revolves around trying to extract dollars from the public as first order goal, but it should be second order. The main goal is to provide useful searches, period. The advertising has to be done tastefully and effectively but it is a secondary consequence of dominance in search, and whilst it might be easy to pass that off as a cliche, it is actually extremely important for Google to continue doing well. So a lot of its capital expenditure is in experimenting with different searches, and control of more data (I don't mean personal data but rather flight bookings, hotel bookings, street info, business locations (and eventually, their relative proven capabilities), and so on.
- Manlobbi
