Friday, July 16, 2010

Google's cash

This may not be the day to follow up on the July 12th comment on Google and other firms. With Google trading like a quarterly earnings slacker rather than a long term growth and innovation story, why would investors pick their heads up and look beyond today. They should, and today offers a lower cost opportunity to look out three to five years for those who have any optimism, or faith, concerning global prosperity.

Google has a balance sheet with $43 billion of assets supported by $38 billion of stockholders equity and no long term debt. That's rich. Richer still is the $27 billion of cash and short term investments that in effect represents undeployed equity. Of that $27 billion it's fair to say that perhaps, rough numbers, $7 billion is useful as a liquidity reserve to reassure vendors, partners, clients, the rating agencies, and regulators across multiple jurisdictions. That leaves $20 billion not invested in the business. If that $20 billion is subtracted from shareholders equity for determination of operating performance, Google's reported ROE rises from 20% to around 50%. That 50% could be said to be the true measure of the performance of Google's operating business model. That's one powerful return.

That doesn't change the fact that the cash is there. Could it be used to initiate a dividend, to buy back stock, further invest in the business, or to make a major acquisition. The reaction to yesterday's earnings announcement is indicative of the accounting mentality of the market. Revenue growth was strong, clicks were up significantly, and even pricing improved, but since Google continued to invest heavily in its business the reported net income was below analyst expectations. In market terms, in trader terms, it was a miss. Taking off the myopia inducing spectacles of the accounting and analyst profession, Google has the money to invest and what better time to do so than when they have opportuninities that other firms don't in this continued strained environment.

In a prior era the significant analytical work needed to understand Google would have been done and marketed by a major securities firm or by a niche analytical specialist like the formerly independent Sanford Bernstein. Today the investment in that kind of work no longer pays the bills or fits the regulatory framework. What detailed work that exists is within the confines of some major hedge funds and major asset managers. When the stock gets cheap enough their day will come.


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