I on the Move

My second post brings me to comment on the carnage in the market.

Frankly, I never like rising stock market. Coz I don't believe in buy high and sell even higher. To me, that's more about luck. The luck in which there are people willing to transfer their wealth to you.

I ain't no Schadenfreude, but I look to analyse before finding value in a stock. Here's my next value play:-

Google Inc. (GOOG)
Current Price : $451.39 (as at 24 Aug 2010 Market Close)

K, so I guess you know what this company does.
You have used Google before and also Google Map, Youtube and Blogspot.
All these are under the Google umbrella.

And we all must admit, we never directly pay a single cent enjoying Google's innovations, but this company has a positive operating cash inflow of $9B in 2009, earns $6.5B in 2009 on $23B revenue.

To put this to perspective, they earned a net profit margin (NPM) of 28%. Wah, that's quite high lor. IBM only earns a NPM of 14% in 2009.

So how Google earns money if all the users don't even need to pay.

ADWORDS. The ultimate money spinner. It's a long explanation, so please refer to Wiki (http://en.wikipedia.org/wiki/AdWords). In short, it's pay per click ads.

Anyway, Adwords made up 95% of Google's revenue and contributes to 98-99% of GOOG's bottomline.

So can Google continue to grow? If so, how?

If nothing really happen (means no new product la), Google will still continue to grow based on growing numbers of internet users in the world, especially in China.

So need to depend on China la. But in China, Google is little brother only, not the ringleader.

Their market share is 24%, compared with Baidu's 70%. (http://www.expressindia.com/latest-news/Google--s-market-share-drops-in-China/652470/)

If they can't breakthrough this barrier and increase market share, their venture into China will just dwindle in the years to come. And frankly, I don't see them breakthrough.

No China growth, can GOOG still work? Maybe ANDROID is the answer.

Android is free also, no cost to the phone companies using this as their mobile OS platform, like Samsung, HTC and others. So the phone companies just need focus on the phone's hardware design will do, Google will spend their own resources to continually develop Android.

Free again? No money to earn?

K, this led me to the following Questions.


1) How many computers are there in the world?

2) How many mobile phones are there in the world?

3) How many smartphones are there in the world?


Answers:-

1) 1 Billion
2) 4 Billion
3) About 250-600 Million, expected to grow to 1-1.7 Billion in 4 years
(the range is so big depending on the source you use, but I always use the more disadvantaged numbers to run my analysis)


The market share (2010, 2009) is as follows:-

Symbian (Nokia) 41% 51%
RIMM 18% 19%
Android 17% 2%
Apple 14% 13%
Microsoft and others 10% 15%
(http://www.gartner.com/it/page.jsp?id=1421013)

You see the growth in Android? Somemore taking market share from leaders and small players. So Cool!!...

But don't let this giant growth misled you. Does Google earn more by people adopting Android? Don't forget, I already tell you Android and everything Google has to offer are free for end users.

What is Android all about?
It's a invitation to phone companies to make more smartphones that can access internet with ease, with better user experience.

Why?

Cuz this is called growing the pie. With 1 Billion Computers users, the growth has slowed down over the years. You can't really expect everybody to use more than 1 computer at the same time, which is limiting growth.

Personally, I have 4 computers at home, but at no time all 4 computers are used as there are only 3 computer users, and not all of us are at home all the time to use these computers.

So how? No computer user means no people searching on Google, means no people click on Ads and means Google don't earn money.

Then, the smart people of Google, instead of waiting for Samsung, HTC and others to divert resources to develop their own in-house OS, give the phone companies free access to Android, spurring them to foray into the smartphone market.

You see the point now?
People on the move can now surf internet, search on Google, watch on Youtube.
The increased internet accessibility should translate into higher ad revenues for Google.

Don't forget, you don't need to use Android to surf the internet, you can use Blackberry, Iphone or others to search also. What Google wants is more people using the internet while being away from their computers. Android is to facilitate this growth

Here is the hypothesis:-

If 1 Billion PC users + 250 Smartphone users = $23B Revenue
Likewise, 1 Billion PC Users + 1 Billion Smartphone users in 2014 = $36.8B

For prudence in calculation, we peg the increase at $10B.
So what is the cost associated with this $10B revenue increase?

Manpower? Not Really
Selling and Distribution? Maybe, but not likely (Cuz this is not AMZN)
R & D? Very Likely, so I will use half of the 2009 R&D cost as an estimate ($1.4B)
Cost of Sales? I will use the COS% of 38% in 2009 as an estimate ($3.8B)
Taxation? The effective tax rate is 22% on PBT in 2009 for Google ($1B)

So the PAT is $3.8B on the $10B revenue.

So what is the compounded annual sales growth and compounded annual earnings growth for GOOG all the way up to 2014?

Sales = 9%
Earnings = 12%

The outstanding shares is 319Million. Assuming no share increase, from my simplistic calculation, the PE in 2014 should be $451.39 / (($6.5B+$3.8B)/319M) = 14x

14x for 12% Earnings growth company is not really ex.
(Please note that at $451.39, the CASH on balance sheet is $30B, translating to cash of $94/share)

If you strip out cash, the PE in 2014 is 11x ($451.39-$94)/(($6.5B+$3.8B)/319M)
Forward PE lower than Growth is good value.

So what's the ST/LT deal here?

ST) I like it at this price, coz I firmly believe this stock is worth $500.00 at the very least. So there is a 10% price appreciation from here.
The 30 days moving average for 3 months (Late May to Late Aug) is between $472-$520.
The 30 days moving average for 1 month (Late Jul to Late Aug) is between $472-$488.
We are already buying at discount.

LT) If you can't flip the stock within 1-3mths to earn 6-10%, then hold it for 12months, wait out for $500 and above. This is on the backdrop that Smartphones will continue to grow and so will Google's Ad revenue.

To wrap up, I give you 2 trivials:-

1) Do you notice now that there is at least 1 popup ad at the bottom while playing youtube video? (Remember, for Google, Ads = $$$)

2) Why would Network System Solutions Giant (Cisco) wanna do a tablet (Cius)?
Why World No. 2 and No. 3 Computer Maker (Dell and Acer) wanna release smartphone (Aero and Liquid)?

Answer : All because Android is free and available.


Google entices other industry leaders into market even if these people have no real niche in that field. (Remember, these people don't sell phone in the 1st place)
GOOG's aim = Just to grow the pie by offering freebies, then take a bigger bite out of the enlarged pie.

SMART.