Below are my thoughts, but before I get into them I will like to reiterate that many pundits, investors, analysts and traders still have no clue as to the type of company that Google is. Imagine a private equity firm that has consistently put out the leaders (as in the number one company) in several industries, every 3rd year or so for 10 years straight. Now, take that private equity fund and give it it's own operations with some of the smartest engineers and strategists in the world, and have them spend 1.5 Billion (that's Billion with a "B"") in R&D annually to discover new things. Now fund that private equity fund and R&D camp with cashflow from the world's largest automated web advertising firm, whose closest competition is so far away as to barely even be known for its wares by the average person. Now, add to it the worlds fastest growing, largesta and most technically advanced mobile operating system. Then add to it the largest patent portfolio and 4th largest handset maker in the world (remember the mobile industry is where its at now). Then add to it the largest and by far the most prominent digital media destination AND publsihing property in the world. Then add to that the largest consumer and enterprise cloud operations in the world. 

Finally, add to the mix the largest, most oft use and most entrenched search engine which (when combined with the cloud properties) basically makes this company the defacto gatekeeper for digital data for the world.

What would you have with this new world conglomerate? You'd have Google, that's what you'd have. Now, on to my anecdotal quips on Google's dramatic Q3.

  • Enterprise wide margins have dropped. I suspect the Motorola acquisition and the influx of mobile revenues, which alter the supply-demand landscape dramatically, thus dropping pricing power for the near to medium term. 
  • Core site revenues are growing along trend line
  • International growth is healthy, though hampered by FX hedging losses
  • Paid clicks increased 33% YOY while costs per click decreased 15% over same period - core margin expansion!
  • Traffic acquisition costs are up 8% YOY - paying more for traffic, but less than margin expanding...
  • Motorola revenues are material, and their margins are weak which pulls down overall margins. This is a foreseen negative but management obviously feels it is worth it, likely due to the largest patent portfolio in the business, the 2nd largest set top box position in the industry and the 4th (roughly) best handset manufacturer in the industry. I'll side with management on this one.
  • "Other costs of revenues" more than doubled YOY, which should be a major cause for concern. As a matter of fact it is such a large increase as to be akin to one-time events. These need to be investigated in detail.
  • The key determinant of the value of this quarter's numbers is whether these increased expenses are (in increasing value from very bad to potentially very good):
    1. 1. - Recurring expenses signaling a structural change in the business
    2. 2. ~ Onetime expenses
    3. 3. + Investments in future revenues inaccurately characterized as cost and expense.
  • My bets are that those algo traders and armchair pundits masquerading as investors and analysts are overlooking strategic investment and calling it expense. A glimpse into the EDGAR filing’s cash flow quip reveals some clues: “Cash Flow and Capital Expenditures – Net cash provided by operating activities in the third quarter of 2012 totaled $4.0 billion, compared to $3.95 billion in the third quarter of 2011. In the third quarter of 2012, capital expenditures were $872 million, the majority of which was for production equipment and facilities-related purchases. Free cash flow, an alternative non-GAAP measure of liquidity, is defined as net cash provided by operating activities less capital expenditures. In the third quarter of 2012, free cash flow was $3.13 billion. We expect to continue to make significant capital expenditures.

You heard it direct from the horse’s mouth! Despite heavy infrastructure and development expenditures, plus the biggest acquisition ever, Google increased free cash flow. Google will make a significant push into original digital media and content. Expect YouTube to compete directly with NBC, FOX, HBO, etc.

Risky? Yes!

Potentially profitable and disruptive? Ask the classified and newspaper industries (or at least what’s left of them) if Google knows what it’s doing!!!!

As excerpted from our nearly 70 page forensic Google report (Subscribers, see Google Final Report 10/08/2010), I attempt to educate on the investment prowess of Google (that is both internal investment and external acquisition). Remember, many of Google's investments have become the largest instances of their type in the indsutry. The largest web video presence: YouTube! The largest mobile OS? Android! The largest mobile ad presence? Admob! the largest online productivity suite? Docs/Drive! I can go on with Gmail, Voice, etc., but if I haven't driven the message home yet then I probably never will. Google management has made it clear that YouTube will compete with major networks and Google Docs will compete and is actually pulling some business from Microsoft Office in the Enterprise. These are mere anecdotal examples. We all know the Android story already...

Google Final Report Sep 29 Page 49

Google Final Report Sep 29 Page 50

Google Final Report Sep 29 Page 51 

Google Final Report Sep 29 Page 52

Google Final Report Sep 29 Page 53

Google Final Report Sep 29 Page 54

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives...


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

Finally, let's look at Google today compare to the broad market over the last 6 months...

goog stock price vs sP

'Nuff said!

Published in BoomBustBlog

You know, I don't even bother to go over banking statements anymore. They are so steeped in bullshit, quasi-fraudulent fallacy and muppetology, that I'm simply waiting for Bernanke to slip up and true market pricing to come to the fore before I jump back into the game. ZeroHedge comments on JPM's earnings as follows JPM Beats On Loan Loss Reserve Release Despite Drop In Trading Revenues And NIM, Surge In Non-Performing Loans:

There is a lot of verbiage in the official JPM Q3 Earnings press release which directs to a bottom line number of $1.40, or $5.7 billion on expectations of $1.24, with revenue of $25.9 billion on expectations of $24.53 billion. The primary reason for the lack of disappointment: no major losses in Corporate from CIO, with corporate generating $221 million in Q3, up from a loss of $(1.777) billion in Q2. And then come the adjustments:  $900 million pretax benefit ($0.14 per share after-tax increase in earnings) from reduced mortgage loan loss reserves in Real Estate Portfolios; $825 million pretax incremental charge-offs ($0.13 per share after-tax decrease in earnings) due to regulatory guidance on certain residential loans in Real Estate Portfolios; $888 million pretax benefit ($0.14 per share after-tax increase in earnings) due to extinguishment gains on redeemed trust preferred capital debt securities in Corporate; $684 million pretax expense ($0.11 per share after-tax decrease in earnings) for additional litigation reserves in Corporate; Then there is a DVA loss of $211 MM in banking. Net-net, after taking into account all one-off adjustments, the Q3EPS was really $1.26. But for all the data fudging, and attempts to make the reported EPS non-comparable to the expected one, following an avalanche of one-time adjustments, the bottom line is this: revenues from trading dropped both sequentially and Q/Q while banking expenses rose, Net Interest Margin dropped to a new record low, even as the firm too a major $967 million loan loss reserve release on its loans to $22.8 billion, even as its total Non-Performing Loans rose by a whopping $1.3 billion to $11.370 billion, the largest quarterly jump in years! Just how JPM can justify such a major contribution to earnings coming from loan losses when NPLs have soared is unclear to anyone with a frontal lobe.

On that note, let's reminisce to the days of Q2 2011, where I penned There's Something Fishy at the House of Morgan. Let me know if you've seen this story before. It's amazing that banks can dance this dance, over and over again and STILL not get called on it:

I invite all to peruse the mainstream financial media and sell side Wall Street's take on JP Morgan's Q1 earnings before reading through my take. Pray thee tell me, why is there such a distinct difference? Below are excerpts from the our review of JP Morgan's Q1 results, available to paying subscribers (including valuation and scenario analysis): JPM Q1 2011 Review & Analysis.

JPMorgan’s Q1 net revenue declined 9% y-o-y ad 3% q-o-q to $25.2bn as non-interest revenues declined 5% y-o-y (down 5% q-o-q) to $13.3bn while net interest income declined 13% y-o-y and (-2% q-o-q) to $12.5bn. However, despite decline in net revenues, noninterest expenses were flat at $16bn. Non-interest expenses as proportion of revenues was 63% in Q1 2011 compared with 58% a year ago and 61% in Q4 2010. However, due to substantial decline in provision for credit losses which were slashed 83% y-o-y (63% q-o-q) to $1.2bn from $7.0bn, PBT was up 78% y-o-y (15% q-o-q).

Lower reserve for loan losses and consequent decline in Eyles test (an efficacy of ability to absorb credit losses) coupled with higher expected wave of foreclosures which is masked by lengthening foreclosure period and overhang of shadow inventory, advocate a cautionary outlook for banking and financial institutions. As a result of consecutive under-provisioning since the start of 2010, JP Morgan’s Eyles test have turned negative and is the worst since at least the last 17 quarters. The estimated loan losses after exhausting entire loan loss reserves could still eat upto 8% of tangible equity.

Non-interest revenues

Non-interest revenue declined 5% y-o-y (down 5% q-o-q) to $13.3bn from $14.0bn in the previous year. Investment banking fees were up 23% y-o-y as debt underwriting fees and advisory fees were up 29% y-o-y and 44% y-o-y, respectively partially offset by 8% decline in equity underwriting fees. Principal transactions revenues were up 4% y-o-y to $4.8bn, the highest at least since last 17 quarters. Asset management revenues were up 10% y-o-y $3.6bn. The bank reported a loss of $0.5bn on mortgage fees and related income compared with gain of 0.7bn in the corresponding quarter last year while securities gains for Q1 2011 declined to $102m from $610m in Q1 2010. Credit card income was up 6% y-o-y to $1.4bm while other income increased 40% y-o-y to $574m.

I have warned of this event. JP Morgan (as well as Bank of America) is literally a litigation sinkhole. See JP Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!!! Shareholder Lawyers Should Be Scrambling Now Wednesday, March 2nd, 2011.

Traditional banking revenues: manifest destiny as forwarned - Weakening Revenue Streams in US Banks Will Make Them More Susceptible To Contingent Risks

Net interest income declined 13% y-o-y (-2% q-o-q) to $11.9bn versus $13.7bn in the previous year as interest income fell 7% to $15.6bn while at the same time interest expenses increased 19%. Interest income declined as a result of steep decline in yield on interest bearing assets despite a 2% y-o-y and 4% sequentially increase in interest bearing assets. Low interest rates and lower proportion of high yield assets have caused a strain on yield on interest bearing assets. The proportion of loans to interest bearing assets (high yield assets) have declined to 34% in Q1 2011 from 36% in Q1 2O10 and 39% in Q1 2O09 while at the same time proportion of Feb Funds rate (low yield assets) to interest bearing assets have increased.  Yield on interest bearing assets which is in a downward trajectory declined to 3.06% in Q1 2011 versus 3.35% in Q1 2010.

Interest expense increased to 19% as interest bearing liabilities increased 2% y-o-y while at the same time yield on interest bearing liabilities increased to 0.81% from 0.69%. Overall, the bank’s net interest margin declined to 3.1% in Q1 2011, the lowest since 2007 as low interest rate environment coupled with low risk appetite have taken a toll on banks net interest margin.

Again, I have warned of this occurrence as well. See my interview with Max Keiser where I explained how the Fed's ZIRP policy is literally starving the banks it was designed to save. Go to 12:18 in the video and listen to what was a highly contrarian perspective last year, but proven fact this year!

Provisions and charge-offs: I have been warning about the over-exuberant release of provisions to pad accounting earnings since late 2009!

Declines in provision was one of the major contributors to bottom line. JPMorgan reduced its provision for loan losses to $1.2bn (0.7% of loans) in Q1 2011 from $7.0bn (4.2% of loans) in Q1 2010 and from $3.0bn (1.8% of loans) in Q4 2010 while charge-offs declined to $3.7bn (2.2% of loans) in Q1 2011 from $7.9bn (4.4% of loans) in Q1 2010 and from $5.1bn (2.9% of loans) in Q4 2010. Although banks delinquency and charge-off rate has declined, the extent of decline in provisions is unwarranted compared to decline in charge-off rates. As a result of higher decline in provisions compared to charge-offs, total reserve for loan losses have decreased to 4.3% in Q1 from 5.3% in Q1 2010 and 4.7% in Q4 2010. At the end of Q1 the banks allowances to loan losses is lowest since 2009.

Although the reduction in provisions has helped the banks to improve its profitability it has seriously undermined the banks’ ability to absorb losses, if economic conditions worsen. As a result of under provisioning for the past five quarters, the banks Eyles test, a measure of banks’ ability to absorb losses, has turned to a negative 7.7% in Q1 2011 compared with +6.4% in Q1 2010. A negative Eyles test has serious implications to shareholders – the losses from banks could not only drain entire allowances for loan losses which are inadequate but can also wipe off c7.7% of shareholder’s equity capital. The negative value of 7.7% for JPM’s Eyles is the lowest in this downturn.

 

For those of you who believe the housing market has put in a bottom, JPM may be the company to believe in. For those a bit more grounded in reality, realize...

For those who still do not believe that the Fed's ZIRP is starving the banks, I strongly suggest reading Did Bernanke Permanently Cripple the Butterfly That Is US Housing? The Answer Is More Obvious Than Many Want To Believe Monday, March 28th, 2011, as excerpted:

Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!!, Bernanke et. al. have snipped the chrysalis of the US markets and economy one too many times. He has interrupted the circle of life...

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the “Peak” phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality…

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference File Icon The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable?as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. All four corners of the globe are currently “hobbling along on one leg”, under the pretense of a “global recovery”.

Reminisce while traipsing through our real estate analysis and research:

  1. On Employment and Real Estate Recovery Monday, April 25th, 2011
  2. A First In The History Of Mainstream Media? NAR Is Identified As A Joke! Tuesday, March 29th, 2011
  3. The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance Friday, March 11th, 2011
  4. Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate Friday, February 25th, 2011
  5. Further Proof Of The Worsening Of The Real Estate Depression Thursday, February 24th, 2011
  6. In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse Wednesday, February 23rd, 2011
  7. When Will the Mainstream Media Be Ready To Call The NAR The Sham That It Really Is? Tuesday, February 22nd, 2011
Published in BoomBustBlog

I got this in my mailbox the other day:

How did PEI just refinance the Christiana Center with a $50 million loan when they are carrying the asset at a value of $30 million on its balance sheet?

Refinancing: http://finance.yahoo.com/news/preit-reports-second-quarter-2012-115500466.html 

Asset Value: 2011 10-K

 Well, that's a damn good question. If you recall, I went over PEI's portfolio with fine toothed, valuation comb in Q4 - reference When A REIT Trading Over $15 A Share Is Shown To Have Nearly All Of Its Properties UNDERWATER!!!

Paid subscribers are welcome to download the corporate level valuation of PEI as well as all of the summary stats of our findings on its various properties. The spreadsheet can be found here -  Results of Properties Analysis, Valuation of PEI with Lenders' Names. In putting a realistic valuation on PEI, we independently valued a sampling of 27 of its properties. We found that many if not most of those properties were actually underwater. Most of those that weren't underwater were mortgaged under a separate credit facility.   

PEI Underwater  Overly Encumbered Properties

If you haven't yet read parts one or two or three or four or five or six or seven in this series, its some engaging reading. Trust me! On that note, let's review my observations of the most recent quarter. Subscribers can download File Icon PEI Q2 Earnings Review _July 2012 to view the document in full.

Overall, the quarter has seen better performance compared to the previous ones. However, the negatives are:

  • The higher base rent achieved this quarter was due to a higher occupancy rate while the per square foot rental metrics continued to slide. I don’t foresee this trend reversing in the near future.  As a matter of fact, the likely course of the US, EU and Chino-Japan is that of recession. Reference RGE Monitor’s Christian Menegatti on US: No more risks of stall speed…stall speed is here, recession next?
  1. The US is witnessing 1.5% real growth through Q2 GDP - Sad.
    July ISM manufacturing data (with a headline still in contraction territory at 49.8) confirms last month’s weak reading. Most components moved roughly sideways- the exceptions included a jump up in inventories from 44 to 49 (which should be viewed as a negative development, amid falling new orders and exports) and a step down in employment (from 56.6 to 52).
    Employment is still positive, but note that it is a lagging indicator—the contraction territory reading of new orders and a worsening of export orders lead us to expect continued pressure on the labor market going forward.
  2. The drop economic outlook is most important when viewing PEI’s quarterly results. Despite the fact that PEI pulled some impressive base rent growth, a closer look at said growth is illuminating…

PEI rents

  1. Average base rent (per square feet basis) has decreased

(US$ per square feet)              

June 2011

June 2012

% Change

Malls Weighted Average

32.40

31.74

-2.0%

Consolidated Properties

31.54

30.87

-2.1%

Unconsolidated Properties

41.73

41.23

-1.2%

Same Properties

32.40

31.74

-2.0%

Pertinent observations:

Base rent (on a total rented basis) is growing in 93% of PEI’s properties (@1.17%) considerably slower than average base rent is decreasing (@-2.0%). Moving up 1.17 inches for every 2.0 inches you have moved down results in a lower position – period!

This means that if we revalue the Company’s property portfolio, it should be negatively impacted by lower average base rent, with that negative impact offset roughly 59% by the higher occupancy rate - which has increased. Of course, that still leaves us 41% underwater, doesn't it?

  1. The company has about 10% of its leases due for renewal in 2013, which if impacted by worsening economic condition described above, could negatively and materially impact the Company’s rental income.
  1. We see the Company as marginally being able to meet its debt obligations for 2012, and that’s assuming nothing else goes wrong in a macro environment that has new things going wrong nearly every weak!!! 

I will most likely launch my TV show sometime next week via YouTube as I shop it around to various networks, and I will included significant PEI analysis in the pilots. I welcome one and all to view and participate. Feel free to tell all of your friends, colleagues and associates about the guy kicking Wall Street in the balls...

PEI analysts

Compare everyone above to my analysis of PEI, then feel free to look at our track record throughout this malaise, starting from 2007. As a matter of fact, don't compare analysis, compare me against the entire banking establishment!!! 

We believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Follow me:

  • Follow us on Blogger
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Published in BoomBustBlog

The following is a submission from an astute BoomBustBlogger known as "LongShortTrader (LST)". His opinion is his own, and not that of BoomBustBlog or Reggie Middleton. If you like what you have read, let me know - there's plenty more where this came from - and remember, GMCR reports at 4pm today. Herb Greenberg and Greenlight Capital have noticed funny dealings with this company as well...

Green Mountain Coffee Roasters Report - 2012 08 01 Page 3Green Mountain Coffee Roasters Report - 2012 08 01 Page 4Green Mountain Coffee Roasters Report - 2012 08 01 Page 5Green Mountain Coffee Roasters Report - 2012 08 01 Page 6Green Mountain Coffee Roasters Report - 2012 08 01 Page 7Green Mountain Coffee Roasters Report - 2012 08 01 Page 8

Published in BoomBustBlog
Facebook gave its first quarterly report as a public company yesterday, and it failed to deliver the goods. Unfortunately, but as can be expected, the MSM and the sell side have apparently failed to pick up on the most pertinent aspect of the conference call, which also happens to have been one of the first things uttered by its young CEO. To wit:
We ended June with 955 million monthly active users, over 1/2 of whom used Facebook on a daily basis and over 1/2 of whom used Facebook for mobile devices. We saw more people using our services at the end of June than at the end of March across all key countries, including 3 million more people in the U.S. Growing the network of people who use Facebook and expanding the social experiences available to them remains the foundation of our efforts and the key to our future success.
Let's parse those words... "Growing the network of people who use Facebook and expanding the social experiences available to them remains the foundation of our efforts and the key to our future success." 
Should the astute fundamental investor (of which there aren't many of us left, are they?) take Zuckerberg's word as to the key to Facebook's future success? If so, methinks it's time to start stuffing those long term puts under the mattress, to wit...

Reggie Middleton on Facebook user growth

There's a whole lot more to cover from the call, but this graphica above combined with the CEO's opening comment pretty much sums it up. Go to 22:24 in the following video for more of the same, just 3 months ago! Sometimes you simply have to break things down in simple terms to get everyone to say, "Golly Gee!"

On Wednesday, 27 June 2012 11:01, I penned Facebook Bubble Blowing Justification Exercises Commence Today, excerpted as follows...

There's an awful lot of chatter in the blogoshpere over the last 48 hours discussing the remote possibility that Morgan Stanley would be able to defend the Facebook offering as properly priced. PUHLEASE! In case my readers and subscribers don't recall my many warnings on this company and the hype job put on it by Goldman and Morgan - reference As I Promised Last Year, Facebook Is Being Proven To Be Overhyped and Overpriced!, let's run through a quick refresher course.

As is often said, a picture is worth more than 982 words...

fb 6-26


Facebook last traded during regular hours at $26 and change, although it debuted to much fanfare at $38 and rose to $42 or so. So, what did the esteemed analysts of Wall Street have to say about this investment dog?

6 Buys, 3 Neutrals

Average Price Target = $39

BofA/Merrill – Neutral - $38 PT
Goldman Sachs – Buy - $42 PT
Oppenheimer – Outperform - $41 PT
JPMorgan – Overweight - $45 PT
Piper Jaffray – Overweight - $41 PT
Wells Fargo – Outperform - $37-$40 Range 
Credit Suisse – Neutral - $34 PT
Citigroup – Neutral - $35 PT
Morgan Stanley – Overweight - $38

How much does the guy who called Facebook a dog from the begininng think its worth? Again, as excerpted...

The specific, numerical, actionable answer from my team is the purview of paying subscribes only, but we can always throw some common sense on the topic for free - as per pages 6 and 7 of our March Facebook valuation report -icon FB IPO Analysis & Valuation Note - update with per share valuation (317.36 kB 2012-05-21 09:43:30), pages 6, 7 and 10.

FB IPO Analysis  Valuation Note Page 06FB IPO Analysis Valuation Note Page 06

FB IPO Analysis  Valuation Note Page 07FB IPO Analysis Valuation Note Page 07

FB IPO Analysis  Valuation Note Page 10FB IPO Analysis Valuation Note Page 10

Let's face it, FB was hot not only because FB was a popular destination for the social media crowd, but more so because "sheeple" not only want to follow big name brands to lose money, they need to! They need their hard earned assets removed by none other than the sell side agents doing God's work, among others. I made this perfectly clear in The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1. It's as simple as this, Who are you going to believe, the sell side hype machine or your lyin' eyes (AKA, BoomBustBlog performance and accuracy)? Reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? for more on the same.

Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for our Facebook analysis, available for immediate download - Facebook Valuation Model 08Feb2012. The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update. It is recommended that subscribers (click here to subscribe) also review the original analyses (file iconFB note final 01/11/2011) as well as the following free blog posts on the topic:

  1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
  2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
  3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
  4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
  5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
  6. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
  7. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly
Published in BoomBustBlog

First things first, those who still believe Apple can walk on water are setting themselves up for a big one. I haven't received so much flak about a (to date) correct call in my life. Well, Apple has missed its numbers twice in less than a year, and both times I believe I was the only one that called these misses - at least publicly.

Google_apple

I've noticed that many who take issue with my analysis of Google and Apple truly don't understand what kind of company Google is. To call it a search engine, ad company, or even Android vendor is to demonstrate an ignorance as to both its business model, accomplishments and aspirations. Google is not a search engine, ad company or even a mobile OS vendor, it is a data company and the foremost data company in the world.

I took the time to explain this in detail on the Max Keiser show last week. I think it's worth a listen. Click here for the full show, and see below for the excerpt....

Apple is too widely owned for the wrong reasons, see Watch As 202 Hedge Funds Follow The Bouncing Apple, Till They Don't!!! Of course you will see Apple's margins decrease because they are selling more iPads proportionately and iPads make them less money...

If the biz class 101 rules ring true, this could very ugly very fast... The Company had a slam bang quarter last, but much of that is essentially unrepeatable in the near term, reference Anecdotal Observations On Apple's Recent Quarter.

image061image061

image051

Now, let's review Apple's Q2 2012 Financial Highlights

iPad unit sales are up 84% over this time last year. Very, very impressive. What is not quite so impressive is that iPad revenues were only up 52% over the same period. Why such a discrepancy? Well, the charts above tell the story. iPads are not as profitable as they once were as buyers continually opt for cheaper and cheaper models as production costs are kept high in order to stay ahead of the increasingly capable competition from Android (Nexus 7 @ $199 per unit) and now even Microsoft (see Is Microsoft Back? If So, Apple Had Best Look Out Below!).

Revenue for the quarter was $35 billion, representing year-over-year growth of 23%. Google registered a 35% increase in revenue for the same period. Just saying....

Gross margin was 42.8 percent compared to 41.7 percent in the year-ago quarter. Wait a minute... Isn't that margin number sliding in the wrong direction? It's because they are selling less iPhones as compared to iPads and the iPads are lower margin products, and the margins are getting even lower as competition ramps up and ASP drop while unit costs rise in relation. Of course, I went through this in detail several times.

For all of those near fanatics who do not subscribe, I suggest you ask a friend who does subscribe to share with you the difference between last month's valuation note target price (page 10 of File Icon Apple Margin & Valuation Note) and the price of Apple today (click here to subscribe). I also urge the same for Google using our latest Google Q1-2012 Valuation Summary.

As excerpted: 

It is worth noting that the key assumptions that underline the above valuations – (1) iPhone continuing to witness stupendous growth *******  in 2012 and ****** 2013 over a larger base and (2) iPhone margins continue to remain healthy off stable prices and despite increase in material cost – should be keenly watched over the next couple of quarters. 

Then ask them bout the logical argument behind the concern with Apple and the extremely volatile price action of the last few weeks. As stated many times in the past, The BoomBustBlog argument and analysis is solid.

What else is there to the earnings announcement? Well we were absolutely correct in terms of the oncoming margin compression of the the product lines, something that was actually easy to see coming but many refused to admit. Of course, there will be those select few that say, "But wait, the company reported an INCREASE in margins while you said there will be a decrease!". Yes, that's true and both can exist simultaneously.

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Published in BoomBustBlog

Reggie_Middleton_Facebooks_Valuation

With Facebook slated to start trading in a few days, I feel it is appropriate to brush off some of the BoomBustBlog research and opinion that can help subscribers wade through the sell side waters. To wit, CNBC reports Facebook Faces User Distrust, Advertising Apathy: Poll:

More than half (57 percent) of Facebook users polled said they never click on ads or other sponsored content when they use the site, according to a new AP-CNBC poll. Another 26 percent said they hardly ever engage in such activity. Only 4 percent of users say they often click on ads — results that are only slightly better than the 2-3 percent clickthrough rate some experts consider the benchmark for effective banner ads.

This doesn't sound too good does it. Well, you can't say I didn't warn you last year: 

Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download - Facebook Valuation Model 08Feb2012.

It is strongly recommended that said subscribers download and input their own assumptions into said model in order for confident preparation before the IPO launch! I just nominally input some very generous numbers and the best case scenario chart (see the chart tab after your own individual inputs) is quite revealing, indeed! The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update. It is recommended that subscribers (click here to subscribe) also review the original analyses (file iconFB note final 01/11/2011)

  1. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
  2. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1

Facebook users have consistently cast a wary and suspicious eye on the platform: 59 percent of respondents said that they had little to no trust in Facebook to keep their information private.

That doesn't sound very good either, does it?

Yet despite those ongoing concerns, the number of users (and their engagement) continues to increase. Facebook has grown to 901 million monthly active users worldwide, with personal computer users spending six to seven hours per month on the site (compared to just 3 minutes for Google+ users), according to recent data from ComScore.

Now, this sounds very, very good. Of course, it doesn't sound as good when you look at it in context...

Slower subscriber growth...

As for Mark Zuckerberg, the wunderkind CEO who turned 28 on Monday inspires somewhat tepid confidence as a leader, with only 18 percent of respondents saying they were extremely or very confident in his ability to run a large publicly traded company like Facebook. Yet pinning down a specific reason was difficult for respondents, who neither cited his age, temperament, nor reputation as significantly affecting those abilities.

Now if one were to ask me why I would be tepid in my confidence in Zuckerberg as a leader, I would say that its not his leadership abilities that are the biggest concern, it is the fact that he can single handedly wreck the company and the weak ass board of directors and the shareholders would be powerless to do anything about it. Instead of referring to him as the leader you can refer to him as the 28 year old potential tyrant and dictator. Reference Facebook CEO Running From Investors 'Cause He IS The Only Investor Whose Opinion Actually Counts?

CNBC also included this following chart...

Hmmm. That doesn't sound too promising, does it? Well, despite all of this, Facebook is finding absolutely no shortage of suckers asses for which to place in the Facebook IPO seat.... 

Hey, it gets worse. WSJ.com and Reuters report GM plans to stop advertising on Facebook:

General Motors Co will stop advertising on Facebook, a move that comes during the same week the social networking website is due to go public.

The U.S. automaker confirmed a report by the Wall Street Journal. A source familiar with the automaker's plans said GM's marketing executives decided Facebook's ads had little impact on consumers.

GM said it will still have Facebook pages marketing its vehicles, but it will drop use of paid ads. Anyone can create a Facebook page at no cost. GM pays no fee to Facebook for its pages, which allow the automaker to reach consumers directly.

... "In terms of Facebook specifically, while we currently do not plan to continue with advertising, we remain committed to an aggressive content strategy through all of our products and brands, as it continues to be a very effective tool for engaging with our customers," GM said.

GM spends about $40 million on its Facebook presence, but only about $10 million of that is paid to Facebook for advertising. The rest covers the creation of content and the agencies involved, The Journal said.

GM, the country's third largest advertiser behind Procter & Gamble Co and AT&T Inc, spent $1.11 billion on U.S. ads last year, according to Kantar Media, an ad-tracking firm owned by WPP PLC. About $271 million of GM's total ad spend last year was for online display and search ads excluding Facebook advertising.

Hmmm... It appears as if the MSM has it out for Facebook today, in direct contravention of its historical actions pushing this company. I wonder if its because I wrote How Does Facebook Drum Up So Much Frothy Interest For Its Overpriced Shares? Help From The Media, Goldman, et. al.

I've had a few subscribers who, after reviewing the (subscription only) FaceBook IPO & Valuation Note Update and Facebook Valuation Model, have seriously queried how Facebook is managing to drum up so much froth and interest for its obviously overpriced shares? The apparent answer is the marketing machine known as Goldman, et. al. The less recognized answer is assistance from the MSM, as demonstrted by this CNBC article - Facebook’s Premium Ad Prices Still Rising:

Pricing for Facebook’s premium “social” advertisements continues to rise, two recent studies have found—a positive indicator that could offset concerns about a dip in advertising growth and help sentiment towards the Internet company’s initial public offering.

This is a net positive statement, no?

A report to be released on Monday by Marin Software, a digital marketing platform that processes more than $100 million worth of spending on Facebook, found a 26 percent increase over the last year in the cost per click for “premium” ad formats such as Sponsored Stories, which highlight friends’ “likes”, comments and other endorsements of brands’ activity on the site.

Wow! That's pretty good growth and pricing elasticity, no? Bring on those newly public shares and let 'em rip!!! 

However, Marin’s report also found the cost per click for Facebook’s standard ads, which make up an estimated three-quarters of the social network’s advertising revenues, fell 26 percent over the last year.

Wait a minute, if 75% of the companies product dropped in price, doesn't that easily swamp the 26% of the companies premium ads that rose in price? An even more direct questions is, why isn't this being reported as the net negative that is is? Let's walk though this step by step for the more arithmetically challenged amongst us...

   % of revenue  Increase/decrease in Average cost Net Change to Gross Revenue
Facebook Premium Ads 25% 26% 6.500%
Facebook Regular Ads 75% -26% -19.500%
      -13.000%

So, according to this MSM article, reporting a net 13% drop in revenue somehow amounts to - and let me quote this so as to be as accurate as possible - "a positive indicator that could offset concerns about a dip in advertising growth and help sentiment towards the Internet company’s initial public offering". Please excuse me as I wipe the splattered bullshit from my computer screen - it's hard to type accurately with those opaque, stinking brown stains in the way. Even worse, it goes to show what portions of the MSM actually think in terms of the intellectual capacity of its readership. 

It would seem that Facebook Finally Faces The Fact Of BoomBustBlog Analsysis

Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download - Facebook Valuation Model 08Feb2012.

It is strongly recommended that said subscribers download and input their own assumptions into said model in order for confident preparation before the IPO launch! I just nominally input some very generous numbers and the best case scenario chart (see the chart tab after your own individual inputs) is quite revealing, indeed! The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update. It is recommended that subscribers (click here to subscribe) also review the original analyses (file iconFB note final 01/11/2011).

 Here's where I broke it down on Capital Account

I also happened to do the same on the Max Kesier show...

I discussed Facebook on the Peter Schiff radio show, the Facebook excerpt is below...

Additional Facebook analysis, valuationa and commentary.

On Max Keiser, go to the 13:55 marker for more on Facebook...

Here are the free blog posts on the topic:

  1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
  2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
  3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
  4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
  5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
  6. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
  7. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly
Published in BoomBustBlog

Okay, it's time to review Apple's earnings. It's interesting that so many in the street and off are coming around to my way of thinking regarding Apple. To me that means that fundamental analysis is starting to return. I have had more hedge funds request Apple research than at any time in my site's history.  Before we move on to the Apple analysis, I want to inform all that I will be discussing this on air live today in the “CNBC Stock Draft 2012” live on @StreetSignsCNBC, 2:30 pm ET, hash-tag: #cnbcstockdraft2012

cnbc_draft_pick

Here’s the competition:

  • Josh Brown – SHAOLIN STOCKPICKERS
  • Abigail Doolittle - DOOLITTLE'S DO-A-LOTS
  • James Altucher – THE BOOM TEAM
  • Reggie Middleton – TEAM BOOM BUST
  • Pete Najarian – THE PONY EXPRESS
  • Paul Hickey – B.I.G. MONEY
  • Guy Adami – THE OUTSIDERS

Here’s the list of stocks:

  • Apple
  • Starbucks
  • Priceline.com
  • Mastercard
  • Dollar Tree
  • Facebook (You buy the stock POST IPO .. you don’t get it at the IPO price…must buy at first day closing price)
  • Google
  • AT&T
  • Johnson & Johnson
  • Dell
  • Microsoft
  • Coca Cola
  • Exxon Mobil
  • McDonalds
  • Groupon
  • JC Penney
  • Netflix
  • Best Buy
  • RadioShack
  • RIMM
  • Green Mountain Coffee

On that note, its time to review Apple's Q2 results. Subscribers, please download File Icon Apple 2Q2012 results analysis.

In short, we significantly underestimated the international sell through of the iPhone, as did much of the sell side. We were off, and wrong on that part and although there was significant internal discussion on raising estimates, the work that went out was not what it should have been. I mention this because we are consistently more optimistic than the sell side in terms of units shipped, thus more accurate come earnings time. This quarter was a snafu. I also mention it because I tend to be a perfectionist and the deviance between the actual results and the projection should have been minimized. With that being said, the logic behind the added caution is still quite valid. 

For all of those near fanatics who do not subscribe, I suggest you ask a friend who does subscribe to share with you the difference between last month's valuation note target price (page 10 of File Icon Apple Margin & Valuation Note) and the price of Apple today, the day after earnings (click here to subscribe).

As excerpted: 

It is worth noting that the key assumptions that underline the above valuations – (1) iPhone continuing to witness stupendous growth *******  in 2012 and ****** 2013 over a larger base and (2) iPhone margins continue to remain healthy off stable prices and despite increase in material cost – should be keenly watched over the next couple of quarters. 

Then ask them bout the logical argument behind the concern with Apple and the extremely volatile price action of the last few weeks. As stated many times in the past, The BoomBustBlog argument and analysis is solid.

What else is there to the earnings announcement? Well we were absolutely correct in terms of the oncoming margin compression of the the product lines, something that was actually easy to see coming but many refused to admit. Of course, there will be those select few that say, "But wait, the company reported an INCREASE in margins while you said there will be a decrease!". Yes, that's true and both can exist simultaneously.

Apple_2Q2012_results_analysis_Final_Page_2

Apple_2Q2012_results_analysis_Final_Page_3

Apple_2Q2012_results_analysis_Final_Page_4

 I will discuss nearly all of the stocks in the CNBC stockpicking list above in the next few posts on my way to studios via BoomBustBlog and ZeroHedge. Comments are always welcome. Follow me:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube

 

 

 

Published in BoomBustBlog

Reggie_Middleton_Facebooks_Valuation

The MSM is echoing BoomBustBlog analysis today, as per Bloomberg: Facebook First-Quarter Profit Drops; Costs Almost Double

Facebook Inc. (FB), the social network planning an initial public offering, said first-quarter profit fell 12 percent as sales growth slowed and marketing costs more than doubled. 

This is exactly as I warned in my initial Facebook analysis to subscribers - The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly... 

Sales had risen 55 percent to $1.13 billion in the fourth quarter, and net income had climbed 20 percent.

Thus, it is highly unlikely one can legitimately factor in the type of growth needed to justify the current Goldman $50B valuation - particularly when you consider that Facebook's growth is already slowing!

 

 

Now, back to the Bloomberg article...

Net income dropped to $205 million in the three months through March, Menlo Park, California-based Facebook said yesterday in a regulatory filing. Sales climbed 45 percent to $1.06 billion, a slowdown from 55 percent in the December period.

Expenses surged to $677 million, reflecting higher costs of helping marketers reach Facebook’s growing user base, which swelled by one-third to 901 million last quarter. The company may struggle to reach EMarketer Inc.’s projection for 2012 sales of $6.1 billion as it awaits the full impact of new tools aimed at wringing more money from advertisers, said Debra Aho Williamson, who helped construct the researcher’s estimate.

“Facebook has a pretty steep hill to climb to meet the expectations that we set out,” Williamson said.

Facebook may seek an IPO valuation of $75 billion to $100 billion, people with knowledge of the matter have said. The upper end of that range would value the company at about 25 times trailing 12-month sales, more than double Google (GOOG) Inc.’s valuation when the search-engine operator went public in 2004.

Before last quarter, Facebook’s sales were already projected to gain at a slower rate this year than Google’s at the time of its IPO, according to data compiled by Bloomberg. At $6.1 billion, 2012 revenue would be 64 percent higher than the $3.71 billion reported in 2011. Google’s revenue more than doubled to $3.19 billion the year it went public.

Zynga Revenue

Facebook said 82 percent of its revenue came from advertising last quarter, down from 83 percent in the preceding period. The company also derived less revenue from gaming companyZynga Inc. (ZNGA), which contributed 11 percent of the total in the quarter, down from 13 percent a year earlier.

The number of daily active users rose to 526 million, an increase of 41 percent from a year earlier. Facebook’s employee base rose 46 percent to 3,539 from a year earlier.

“Our costs are growing quickly, which could harm our business and profitability,” the company said in the filing. “Providing our products to our users is costly and we expect our expenses to continue to increase in the future as we broaden our user base, as users increase the number of connections and amount of data they share with us, as we develop and implement new product features that require more computing infrastructure, and as we hire additional employees.”

The paragraph above, decoded: These expenditures are true expenses, and not actual investments for they are needed to keep the company above water in the competition with Google, et. al., and are the stuff that actually fosters long term growth.

From C|Net:

 Its first-quarter revenue rose 45 percent to $1.06 billion compared with a year ago, but it was down 6 percent compared with the last quarter of 2011.

At the same time, the company's net income for the first quarter fell 12 percent, to $205 million from $233 million a year ago. And it was down from $302 million in the fourth quarter of 2011.

That drop in quarterly revenue and profit comes even as Facebook continues to see big user growth, meaning that it's making less on each user. Facebook said that it now has 500 million daily active users, compared with 372 million a year ago, and that its monthly active user number -- people who use Facebook at least once a month -- has climbed to 901 million from 845 million in December.

Its average revenue per use, called ARPU, fell 12 percent from the fourth quarter of 2011, and Facebook said that was mainly due to "seasonal trends." The company points out that it saw the same seasonal weakness during the fourth quarter of 2010.

Even more telling are the comments from that article...

15% of revenues came from Zynga...and that stock's not looking too hot these days. For those on the fence about whether this is a worthwhile investment, consider the last time you actually clicked on an ad in FB.
Posted by techgeekdude 

I am a once-a-month FB user at most. If FB is making any money off of me they are ripping off the one paying them that money. I may be counted as a visitor, but I am worthless to FB and anything connected to them as I cause no $s to pass their way.
Posted by UnderStress 

I discussed Facebook on the Peter Schiff radio show yesterday. The entire show can be heard via podcast from his site, and the Facebook excerpt is below...

From my previous Facebook analysis public excerpt:

Yeah, I was on a roll last year, wasn't I? That's not the gist of it either, as we reminisce even more...

Here is an excerpt for those who do subscribe to our research and services, YET!

Even with the fund taking 45%+ losses and the LP (limited partners, ex. Goldman's clients) losing every last single dime, Goldman easily pulls a 33% return. God forbid Facebook share actually do well, Goldman's numbers look... Well... Damn near illegal! Almost as if they can pump up a price without any fundamental justification or public disclosure of financials and still sell it retail to the public. Of course, such a thing could and would never occur - not with the every vigilant SEC to take our backs. Excuse me while a cough a up a lung from laughter...

You see, this is the dirty little secret of private equity funds. They are not in the business of investing money for client's maximum risk adjusted return. They are in the business of collecting fees. Those poor innocent (or not so, particularly when they are investing their clients monies, hence are in the same business) souls that actually believe as the commenter above quoted "Wow!!! If Goldman is putting their money in this, it must be serious!"simply the lamb being led to the private equity/IPO slaughterhouse. You see, there is no loss to GS - no matter how high they bid up the valuation nor how hard it comes crashing down. This gives them the incentive to shoot for the sky with the private equity deal, because when the IPO breaks, its bonuses bigger than nearly any have ever seen. Facebook makes and excellent marketing story as well. Boy Wunderkind CEO, a product nearly everyone uses and loves, and a mysterious dearth  of business model to give it a mystical effect. Don't forget the involvement of the "cream of the crop" of Wall Street banks, whose bankers, traders and analysts are all so much smarter than us guys from Brooklyn. Add this up, and you get "Wow!!! If Goldman is putting their money in this, it must be serious!".

Additional Facebook analysis, valuationa and commentary.

On Max Keiser, go to the 13:55 marker for more on Facebook...

Last month I released an update to our Facebook IPO analysis (subscribers may download it here FaceBook IPO & Valuation Note Update). In its caveats section, I made pains to make very clear that one of the biggest threats to Facebook investors actually emanates from within, to wit:

FB_Corporate_Governance_issues_pt_1

FB_Corporate_Governance_issues_pt_2

Of course Facebook enthusiasm is burning hot. The coals in the "investor" (and I put this lightly) fire are being stoked by none other than the sell side agents doing God's work, among others...

Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download - Facebook Valuation Model 08Feb2012. The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update. It is recommended that subscribers (click here to subscribe) also review the original analyses (file iconFB note final 01/11/2011) as well as the following free blog posts on the topic:

  1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
  2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
  3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
  4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
  5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
  6. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
  7. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

 

Published in BoomBustBlog
Friday, 20 April 2012 10:33

Google 1Q 2012 Earnings Update

Google posted robust 1Q results topping the consensus estimates by a wide margin – revenues increased 24% to US$10.6 billion as against US$8.6 billion in the same period, a year earlier. This was significantly higher than the consensus estimate of US$8.2 billion for the period.Revenues were in line with our estimates – we expect full year revenues to total US$43.1 billion. Revenues from Google websites accounted for around 69% of total advertising revenues while that from the partner websites contributed to around 27% of revenues. The remaining 4% of revenues were accounted for by licensing and other fees. Geographically, the US generated around 46% of total revenues, UK accounted for 11% of total revenues while other markets accounted for the rest 43% of revenues.

All paying subscribers should download the Google Q1-2012 Valuation Summmary, wherein we have updated the valuation numbers for Google using a variety of metrics. 

Click here to subscribe or upgrade.

Growth in revenues was driven by an increase in click volumes, especially in the US market. The number of clicks increased by a significant 39% year-on-year and 7% quarter-on-quarter during 1Q highlighting the increasing popularity of the search engine. However, on the flip side, the cost-per-click or the average cost paid by advertisers declined 12% year-on-year during the period – largely due to the growing business in the emerging markets and mobile space, which usually carry lower margins. Nonetheless, Google's strong position in the mobile space – including both smartphones and tablets – is enabling the company to generate robust revenue growth. The Company also continues to benefit from the success of its DoubleClick ad exchange as well as the overall improving quality of advertisements. Google also witnessed growth in the European and Asian markets. Japan registered strong performance largely on account of higher contribution from SMB segment.

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Total costs increased 16% year-on-year to US$3.8 billion as against US$2.9 billion in the same period, a year earlier. This was largely due to the fact that the Company made investments in new products, increased its advertising expenses as well as increased wages. Further, higher amortization charges, the data center operations cost as well as content acquisition costs drove the overall cost of sales higher. As a result, higher costs had a negative impact on gross margins which contracted by 136 basis points to 64.4% as against 65.8% in the year earlier quarter.

Operating expenses increased 16% year-on-year to US$7.3 billion as against US$6.3 billion in the same period, a year earlier. A 25% jump in selling and marketing expenses was largely responsible for the spike in operating expenses. The R&D expenses in fact declined as a percentage of sales during 1Q. Higher operating expenses had an adverse affect on margins which contracted 77 basis points to 31.8% during 1Q.

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From the profitability perspective, Google outshone nearly all its competitors as earnings increased by a significant 61% to US$2.9 billion (or US$8.75 per share) as against US$1.8 billion (or US$5.51 per share). Further, the Company continues to have a strong balance sheet with cash balances at an enormous US$49.3 billion at the end of 1Q.

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All paying subscribers should download the File Icon Google Q1-2012 Valuation Summmary, wherein we have updated the valuation numbers for Google using a variety of metrics.

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade. A couple of bits from our archives...


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

Published in BoomBustBlog