Saturday, February 2, 2013

When will Google Pay a Dividend?

Every once in a while all investors must stop and asking themselves an existential question: Why am I buying a stock? In the case of Google (NASDAQ: GOOG) this question has a particular resonance. It is a fantastic business and on any metric the stock is cheap. On the other hand, there is no dividend and seemingly no intent to pay one in the future. There isn’t a takeover prospect. Who could acquire Google? As for the cash pile (which at $50+ billion now approximates to around half of Greece’s public debt) I get the impression that there is no shortage of investments that the management would rather make before initiating a dividend. So why buy Google?

Google, Nikola Tesla and Free Markets

I doubt this subheading has ever been used before so it might win me some hits via Google’s search engine. However, it does express some key points about Google. Indeed, Larry Page suggested searching for the great Serbian inventor as a demonstration of its Knowledge Graph operations.
My suspicion is that if Tesla was alive today he would be sought out by Larry Page and then employed at Google in order to build out his dreams. And the world would be a better place if he was. Consider that the other likely option (as Bill Gates was quoted as saying on a similar subject about Goldman Sachs) would be that he would be employed at an investment bank to try to develop telecommunications systems that help them earn more money via high frequency trading. I prefer Page’s approach.

The world needs such people, and I note that the variant of capitalism and free markets that we have today has no monopoly over the history of scientific and technological breakthroughs. You do not need free markets or journalists screaming about one quarter’s earnings in order to develop science, but you do need freedom of the exchange of ideas. The two things are not necessarily the same.

Google Isn’t Just About Invention

Google glasses, Google driverless cars, Google wallet, Google mobile phones, the list of developmental projects goes on, and I think Page is doing a great thing here. Many people dream of being hugely successful and wealthy and achieving public acclaim, but few have the vision and courage to carry on believing they can invest and achieve excellence in everything they do.

However, it would be a mistake to pigeonhole Google as a company of market-na├»ve inventors. The truth is it is highly focused on profitability and services like Google Wave and Google Buzz are discontinued if they do not succeed. Similarly, I heard no mention of Google+ on the conference call even though activity has picked up substantially on it. Motorola’s home division is under agreement to be sold for $2.5 billion and the Motorola acquisition was made with an awareness of product development with mobile apps, search, maps and Android in mind.

Why the Motorola Deal Makes Sense

Motorola is currently losing money for Google, but the naysayers need to remember that it had a device pipeline in place that has to be managed through before we can see the full impact. In addition, if we think about mobile, it is the software, apps and intellectual input that count these days rather than hardware. Nokia (NYSE: NOK) always had the most beautiful hardware. But its phones were surpassed not because its hardware wasn’t up to scratch or because it didn’t have the technology. Its failure was in anticipating future trends and developing products to match these trends. Apple (NASDAQ: AAPL) did that for the industry, but here again there is a lesson.

Apple may well have created a best in breed product through a mix of hardware and ecosystem, but rivals like Samsung and HTC are more than capable of seeing what functionality works and offering it to consumers at cheaper price levels than Apple can. The good news for Nokia and for Google is that there is no reason why they too can’t do these things. Nokia has the pull of being seen as the Windows phone of choice and has good potential to be the ‘cheap smartphone’ option for emerging markets.

Google already has Android in place with which it can learn how to best tailor functionality and options into a phone.  Throw in the migration of search and advertising from PC to mobile/tablets, and Google will generate synergies from buying Motorola.

Underlying Trends

As to the core business, the shift to mobile/tablet usage has caused some changes with Google’s core metrics. From the evidence of my own blog, I can assure readers that mobile click through rates are significantly lower than PC, but tablet rates compare favorably.  This is understandable because I would expect the demographic of tablet adopters to be more willing to explore and purchase online.

Moreover, the challenge for Google and advertisers in general will be to integrate their offerings across all platforms, so instead of thinking PC/mobile/tablet as separate revenue streams they can deliver tailored solutions in order to drive revenues across the platforms.

In addition, increasing mobile revenues are helping to reduce Traffic Acquisition Costs (TAC) as a share of consolidated revenues. Revenues are growing as a consequence because Google is generating relatively more revenue from its own sites like YouTube etc. All data is in $billions.

There is no reason for Google to fear mobile.

Where Next for Google?

Google is managing the transition to mobile/table revenues quite well, but investors need to think longer term about where the value lies in making an investment. History shows that the likes of Intel, Microsoft and Cisco do eventually become dividend & buyback companies when they mature. Will this be the case with Google?

My guess is that it will be a while yet, and investors will have to have confidence in Google’s internal and external investment in order to add value before Google matures enough to start paying a dividend. Meanwhile, enjoy the great contributions that the company is making to how the world works. It could be doing them for a while yet before stockholders see a dividend.

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