Long Google Again

Comments (Archived):

1. So what time period do you consider “long?”

   1. In what context?VC or public stocks?

      1. Public stocks, and specifically, what you mean by long in the context of Google at this moment.

         1. Hard to say but I expect to own this stock for at least the remainder of theyearBut if something changes my outlook (either to the positive or negative), Iwould sell or buy more

         2. Dan,I think in this context Fred meant long as in “to buy”, as opposed to being “short” when you short sell without owning the stock with the view that the price will drop.

2. I’m surprised you’d get involved with derivatives.As Peter Lynch used to say, unless you know what you’re doing, derivatives are a good way of getting poor quickly.Then again, you probably *do* know what you’re doing.

   1. Well I don’t really know what I am doing when it comes to selling putsBut I’ve been advised again and again here in the comments that if I want tobuy the stock at $300 or at $275 then instead of a limit order, selling aput option is a better way to do that

      1. Although you have to figure your cover into the price , and any fees, I believe.

      2. The point with derivatives is that you should do them properly or not at all. They need to be constantly monitored (especially if you’re the seller in the case of options) and rolled-over frequently. You also need to get your maths right, because your counterparty certainly will.Personally, I leave that stuff to the pros.

         1. Good feedback.

         2. Short puts do not need to be monitored, if you are willing to buy the stock at the strike price…in this case 300 or 275.You can literally log in once/month.

         3. Well, derivatives for their own sake might need to be monitored. But replacing a limit order by selling options is a freeroll, and doesn’t need to be monitored any more than a limit order.To explain, suppose Fred decides to place a limit order for 100 shares of GOOG at $300. Now if the stock hits that price (or anything below) he’s buying. If he sells 1 put contract for 100 shares, same exact thing. Except he pocketed the premium, getting a bit of a discount. And if the shares never dip to $300, he pockets the premium then too. Similarly instead of a sell limit order you’d do a covered call.It’s effectively like your broker is paying you to place a limit order.

   2. It’s not difficult. Divide # of shares that you want to OWN by 100. Sell that many puts in the nearest month at the strike price where you DEFINITELY want to own the stock.On the Monday after the 3rd Friday of every month, you will either own the shares at the price you wanted, or you won’t (which means you profited all of the amount you sold the puts for).If you own the shares, cool—you got them cheaper (via the price you sold the option for)If you don’t own the shares, cool—you got a profit from selling the options to zero and you can do it exactly the same way for the next month.

      1. If the market crashes (and you’re quick) you can always pull/modify your limit order, whereas if you sold puts two weeks ago you can get hung out to dry.When I was a broker I saw many colleagues make/lose a ton PA with futures and selling calls/puts.Like I said, if you know what you’re doing, you can probably add a bit of value to your portfolio; if you don’t you can get hurt big time.

         1. If the market crashes and you’re quick you can close out your options position.

3. I have the same question. Not as a VC, as (correct me if I’m wrong) that’s pretty standard, or varies w/ the valuation) but for stocks generally and for Google in particular?

4. Fred I think we are all in trouble here and it will get a lot worse. If you are talking about timing the market, then I like your approach. But if we are talking longer term, the entire business model of Google is suspect. If Eric Schmidt really got crazy, Google could be run with 100 people, or maybe 500 people. What ever the number, it could be a whole bunch smaller. The reason for this is that it is dawning to me that the stimulus will do nothing except make the problem larger. I was playing poker and a friend lost a bunch of money and asked to borrow some money from me he said he would pay me back. Of course he lost the money and then asked me for more. Being a good friend, I gave him more. He lost that. He then leaned to me and said the only problem is that I did not lend him enough, he could feel a hot streak coming on. I refused. I was never going to get the money back but I did him a favor by cutting him off. In our current budget, we keep asking the Chinese for more money to borrow. Sooner or later they will cut us off. Except they may break our knees to get paid back.Inflation, lower standard of living and civil unrest could be possible ahead of us. Sound crazy doesn’t it? How does Google’s business model survive hyper inflation, the contraction of the consumption economy and a much lower stock market? They survive by becoming a much smaller business. If only GM had become a much smaller business 10 years ago they would have a chance now.

   1. The Chinese are not really much of a problem economically. They need oil. Oil trades in dollars and nothing else. They need dollars ot buy oil.They get dollars from their trade imbalance with the US. Excess dollars are kept in dollar denominated investments or instruments (Treasuries) because they may have to be used to purchase oil. They will not take a Citi VISA card for oil.The Chinese are enjoying a great tax break in the declining price of oil. Don’t be fooled by current prices, oil is headed down again when summer driving fails to materialize as predicted.The Chinese have no other real way — or currency — to hold their trade imbalance other than in dollars.I worry about the Chinese more from a military perspective relevant to Taiwan. I am convinced the current Chinese old time Communist government has completely lost the people (remember they were capitalists as recently as 1949) and capitalism still reigns within 50 miles of the coast and in Hong Kong and all the port cities. I worry that the Chinese communist ancient leadership is capable of one more huge blunder.Of course, this is all before Hillary told them we “need” them so desperately. Sheesh!I’d like to hit her “reset” button cause I’m “outraged” myself.

      1. Dead on @oil @dollars… though, I doubt very much that hard line communism is going to rear its ugly head. I actually think we might witness an even more open China economically… they might very well be cajoling us to keep up with them. I have a fantasy that they tie support of US policy with Iran to better trading conditions. Wouldn’t that be marvelous? Stop talking about US debt, they know inflation will take care of that soon enough, focus on reducing trade barriers, encourage Obama to fight against protectionism.We have no time to worry about Taiwan.

         1. Study the history of the Chinese intervention into the Korean War. We had clear warnings and yet we ignored them. China has similiarly said for years they want Taiwan back.The Chinese were not impressed with our land army or our air force and our lack of will to bomb Manchuria.They have been building landing craft for a decade. Landing craft are only good for one thing.They have announced and are pursuing a “blue water” navy — no real threat to our navy but something they are willing to spend a lot of money on. They have built a state of the art naval facility including submarine base in fairly close proximity to Taiwan. They have been massing troops and rockets capable of hitting Taiwan for years.The Chinese take the long view. They were a sophisticated society and an empire when we were in loin cloths — their real frame of reference.The Chinese have announced they are spending 15% of their GDP on defense — who are their military rivals? Why are they spending so much? A dollar goes a lot further in China than in the US cause our military force costs so much more.The US has not had a very good record of “staying the course” in the long run. The Chinese know that we would have a very difficult time justifying coming to the defense of Taiwan. I personally would be very reluctant to go to war over Taiwan.These guys were willing to cheat at the Olympics — their coming out party of sorts. Never underestimate what bastards they can really be. Look at their enormous investment in military intelligence gathering, spying and industrial espionage. They are in it to win it.The Russians invaded Georgia on the first day of the Olympics. The bad guys know what we and the world are paying attention to and are willing to exploit the advantage.China has been a growing military problem for a long time. They are the main beneficiaries of our focus on al Qaeda.Keep your eye on China. The Chinese are making huge inroads in Mexico.

            1. i actually am a bit concerned about china dumping US treasuries as economic warfare. if israel attacks iran, US sides with israel, china sides with iran…israel/iran sabre rattling still going on: http://www.jpost.com/servle…regarding oil, i have gotten pricing it wrong for the past year and thus have given up trying to figure out WTF is up with it. out in conspiracy world, though, one increasingly popular notion is that the price of oil is being artificially kept low as a way of keeping the oil companies unprofitable, which in turn will set the pretext for oil companies to be nationalized. lindsey williams ( http://www.reformation.org/… ) is the guy who is saying this, says he gets his info from an insider, the same insider who told him oil was going to $50 when oil was at $150, which lindsey williams did correctly call.

5. How worried are you about antitrust issues? We’re hearing a lot of rumbling on that lately, and I feel like something might actually come of it given their massive and increasing shares of search and advertising. It makes me hesitant to buy into them, since that sort of thing can do quite a number on share prices.And even ignoring that, what do you feel their chances are for long-term growth?

   1. The stock is not trading like a growth stock. Its trading like a blie chip value stock (when those terms meant something). So I am not focused on growth but balance sheet and sustainability. They score well on those frontsI would be surprised if Obama went after Google with eric schmidt being so close to him and his administration. But one never knows.

      1. Too many people are pointing out Schmidt’s close ties to the administration for my comfort. Seems like a great way for Obama to prove that they’re beholden to no one.

6. Fred – I totally agree with you. Online advertising still has alot of legs long-term (gap between time spent vs. dollars spent is still threefold) and at 5-6x EBITDA, you are sure to see multiple expansion as well as strong growth. I’m long Google as well.Maybe a few of us should blog and/or Twitter “crowdsource” top 10 tech stocks as a basket? I’d nominate Shutterfly as well, now trading at 2-3x EBITDA (although niche, very promising long-term play at the intersection of photo sharing and e-commerce) and Constant Contact, a Boston company which has a great future as email marketing continues to grow.Note: I am not a major investor or board member at either.

   1. well our favorite research analyst of the first bubble has a different view.http://www.businessinsider….personally – i see a broad tech strategy as a very sound way out of this mess. i am long VMware, AMZN,AAPL and GOOG.but then what the hell do i know.

      1. A lot

   2. i think that is what stocktwits is supposed to be doing jeff- but i have never tried it.

   3. I love constant contact and think it is very well positioned as the low cost/low touch provider of a key service to many companiesLess sure about shutterfly. I think it has issues with social media long term

7. Your sense of timing-is obvious excellent puts and calls are no substitute for you own judgment we can buy put’s and calls but not judgment-a lot of money is made by accumulating stock at the right price point’s being tech oriented you have a better sense of tech market than most brokers-who cover all sectors. Buy who makes money-

8. I think a 23 PE w/ a fragile market is a pretty brave move just now. I think we are headed to 5-5500 Dow. I am primarily motivated by the time period before we see any traction from the government’s many, many moves. Shortly we will be in the summer doldrums.This is no reflection on Google, I just don’t think anybody can separate themselves from the pack in the near term. I think we will all look back and think a 12 PE is a great thing.I am a little confused on your “put” writing strategy. Take a look at the Options Council website. I always find their terminology and explanations to get me on the right side of the trade.

   1. To be clear, I am not “all in” on this stock yetI bought about 1/4 of what I’d ideally like to own and have my next limit order in at $275/share

      1. Better investment? Dancing lessons! LOL

         1. I’m working on thatFortunately we can afford to dance and own google at the same time!

9. I think it would be interesting to discuss stocks based upon more comparable data like market cap. Per share price alone does not really allow for easy comparison or discussion. Google at $300 is difficult to grasp, but Google’s market cap in the range of $20-30B in excess of GE, Apple, or HP is another deal.

   1. I like to think of it in this wayIf I could buy the whole thing and put the cash in my pocket, I’d be out $85bn for GOOGIt’s producing about $8-9bn in ebitda each yearSo lets say I have to pay half of that in taxes, I’d clear say $5bn in cash each yearIn 17 years I’d have all my money back and I’d own GOOGAnd that assumes there is no growth whatsoeverThat doesn’t sound like a bad deal to meI realize it would be a better deal at $60bn, but I am not sure it will get there because others might feel that the current deal is good enough given the power of the franchise

      1. i’ll tell you what – and i know you are a fan of opentable. if this one can get out – i would be ‘all in’ here.I am looking at a project that is a social utility using RFID for restaurants, clubs and the such, and part of the diligence was a thorough examination of the OT footprint. I was blown away. Did you know that they get up to $7 per ressi in some instances – one prominent restaurant owner in boston went as far as to say that is has become ‘mission critical’ to how he runs his restaurant – he even integrated the back of house with micros.i think we are going to to see great things coming at the apex of geolocating, and social commerce, and these guys are perfectly positioned to be there, if they choose to face outwards as opposed to driving efficiencies within the value chain.problem is – how the hell do they get out?

         1. You and I take the entire deal!

            1. no problem – you take the equivalent of Akamai’s network uptime – i’ll fill in the rest. Don’t counter with Twitters equivalent – i wont take it 😉

      2. The trick is just getting that $85bn together in the first place. From there it all makes a lot of sense!

         1. So true

      3. Is there a stock screener that does this calculation automatically? Using your formula and data found on Yahoo Finance, here’s the payback period for several stocks:Google 21.08GE 1.81Wal-Mart 12.47Coke 17.25HP 6.99Apple 14.65

         1. Great stuffI think the google numbers may be impacted by the non cash charge toearnings they took last quarter

   2. Market cap comparisons are useful when judging the relative size of companies vis-a-vis their target markets.When it comes to valuation, there is no difference between per share valuations and market cap based valuations (you just multiply both parts of the ratio by the number of shares outstanding).Having different classes of shares (with significantly different rights) can mess things up though.

      1. Uhhh, don’t forget the debt and depreciation is a real cost in the long run. Want to drive a 17 year old car?

         1. My turn to say Uhhh – debt and depreciation affect mkt cap based multiples the same as they do per share ones. But I’m sure you know this, so I must be missing something….As regards driving a 17 year old car, well perhaps not. But I wouldn’t have minded buying Coca Cola in the seventies, when (apparently) they had had amortized their 80 year old brand to zero on their books!Edit: ok, got it, you were replying to Fred, not me.

            1. Not if you’re using the shorthand of EBITDA as your measure of cash flow.Businesses in general have a tendency to avoid the replacement of capital as an ongoing cost of the business — even depreciation is not an adequate measure of the real cash needed because the capital replacement almost always costs more than the capital replaced.There is a huge difference between buying a bit of stock at a market price and going for the entire enchilada — different numbers in play. First share and last share are hugely different.The issue w/ CC is not the brand equity (not as a marketing term but as a financial term) but rather the capital or capital equipment employed in the business. Heck, they can still even afford a jet.That’s why when using EBITDA as a proxy for cash flow, it is vitally important to get back to a simple statement of cash flows when actually assessing cash flows. Cap ex v depreciation is a real gut check when looking at where the cash has gone and where it will continue to go.Another weird consideration in buying companies is working capital — not just as the accounting derived term — but as real cash flowing through the company as juice. That’s why DSO has become such an important measure of financial efficiency.I have made almost every mistake one can make in buying companies and I have paid full tuition for the lessons — still there are some unbelievable private company opportunities out there if you can learn to kiss a whole lot of frogs. Good sized private companies are trading at TTM multiples of 3-5 which would demand PE ratios of 12 if public.

            2. Bear in mind Fred was talking about GOOG in a no-growth scenario. Under such circumstances, capex is generally less than DA, because it costs more to grow a business than it does to maintain it. As such, post tax EBITDA is a pretty good approximation of FCF.That said, no two business are the same. Your points regarding replacement cost are very true in some circumstances and not true at all in others. In the specific case of GOOG, the replacement cost of IT kit (on a like-for-like basis) is falling, even in real terms.In other businesses replacement cost isn’t really an issue: a 20 year old pipeline (assuming it doesn’t leak) does just as good a job as new one.Some of the most interesting investment opportunities can occur when you find highly depreciated assets which don’t need replacing (eg. a wood working business I once looked at: the machines were 20 years old, with new motors, and still going strong).

            3. I can certainly see the truth of everything you say and this is an academic exercise but I would be extremely wary of any proposition which suggested doing the same “thang” for 17 years — I am absolutely certain one cannot get away with that.Much of what you describe are “special situations” which are real and can be found but are not the norm.I have a ’66 Impala SS convertible — had it for about 25 years. Runs like a champ and is a smooth ride. It’s my spring and fall car — but it is really the exception. Of course, I only drive it about 1000 miles per year. It is great transportation but I know it is not “normal” transportation. I live 4 minutes from my office but sometimes I take the long way home.

            4. Yup, there’s no disagreement. In fact you were 100% correct when you pointed out that post-tax EBITDA only approximates to FCF when DA and capex are in equilibrium.I used to do this stuff for a living so it’s nice to know I haven’t forgot it all.Good to chat.

            5. I’m loving this discussion you guys are havingKiller stuffTalk about hacking education! I’m gonna send some MBAs over here for somelearning

            6. Yeah, it’s good to talk in a troll-free environment, and you’re right that Disqus does promote forum-like discussions.Still, we’ve only scratched the surface. I was going to point out that you should really use enterprise values (debt+mkt cap) when calculating EBITDA multiples, but since GOOG is net cash I didn’t bother.

            7. One thing I have never understood – and I have asked a lot of people – is the massive gap between public and private valuations that you point out. Is it just the ability to sell easily? When what really matters are cash flow and dividends, is the public company premium worthwhile?

            8. You should put that question to my friend who’s been trying to sell his restaurant for the past 8 years (seriously).Especially is tough times, liquidity is everything.

            9. Unfortunately having run both public and private companies, I could write for hours on all of the issues involved but I guess the essence of it all is that the supposed protections created by the more intense regulatory environment (SEC, PCAOB, industry regulation, audited financial statements), the supposedly more professionally managed enterprise and the ease of entry/exit by buying/selling a single share in an auction marketplace with rational pricing mandate a premium for those privileges.Higher “quality” cash flows? Hmmm, I don’t know?This is why when the public markets were flogged with inadequate regulation, horrible audit performance (GM has a “going concern” issue and the auditers just discovered it this year?), weak management and wholesale unbalanced short selling or irrational exuberance — the markets and values tanked.The theory of public companies is kind of like the theory of socialism or Communism — sounds great but doesn’t work so good sometimes. The application of public companies is kind of like democracy — an ugly flawed system with lots of imperfections but better than all the other alternatives by far.In the final analysis it all gets down to the integrity and honor of the people involved.

            10. One other tiny point is the drag on cash flow that is created by the regulatory arena in which we currently operate. The cost of corporate governance, legal advice, accounting advice and incremental regulatory requirements (SOx 404) are very significant. So, public cash flow is often a bit less than one might expect and perhaps the multiple is partly compensatory.

            11. Right now there is a discount to being a public company. In my experience public companies are way more affected by the ups and downs of the investor psyche than private markets

            12. That’s because at the moment the market will sell you bits of stock at a price at which you would have no hope of buying the whole company.I’ve always believed that inferring a company’s entire valuation from trades in just a few of its shares offers only an approximation.Trades in non-listed companies tend to be done at prices at which the entire company could, in theory, change hands.

            13. Talking about the per share price of a stock alone similar to discussing the world’s skyscrapers by comparing one brick from each building. There’s has to be a better way to discuss stocks that is, uhhh… more concrete.

10. I’m less optimistic about Google than most, but it’s clear that their search dominance will continue for the foreseeable future.GOOG needs to do something about their wretched advertising department. The 2007 Double-Click acquisition was one of the most mind-boggling mistakes that I’ve seen such a strong company make in recent memory, and I don’t think I’m alone in making that observation.Double-Click built up a *generation* of negative brand equity during the initial internet boom. If you were to play a word-association game with any webmaster from the late 1990s, and you said “Double-Click,” they would instantly reply “Evil” or “Scum.” Not that they necessarily deserved it.I work in the trenches writing material that will be accompanied by Adsense. I see nothing but belly-fat ads these days, almost no matter what the topic of the web page. You’d think that a company that employs such brilliant people would be able to deploy a better advertising program, even considering the massive troubles in that sector.I hope they come through, but I have not been seeing encouraging signs. I want to be proved wrong on this.

    1. The wrinkle and belly fat ads are awful

11. Very few companies can claim to mantle of massive wealth destroyer over the past two years like Google. Even though they are one of the great tech companies of all time they have been a complete disaster as a stock over the last 24 months. I’ve attached a chart to prove the point, stubborn as the facts are:http://finance.yahoo.com/ec…

    1. Right. But amazon did that to its shareholders once. So did apple. I think most great companies do it at least once

       1. Agreed that it’s worth buying. The only thing that makes me a little nervous is that is began crashing before the economic tsunami hit.