October 18, 2013

Google Stock Tops $1,000, Highlighting a Tech Divide


SAN FRANCISCO — Google has done something few companies ever do in the stock market: it has joined the $1,000 club. On Friday, Google’s share price jumped above that price for the first time, another milestone in its remarkable ascent from $85 in its public offering in 2004. On one level, $1,000 is just a number. But on another, it is a reminder of the new order that has taken hold in the technology world in just a few short years — and how far apart the winners are from the losers.Google closed up 14 percent on Friday, at $1,011.41, after a better-than-expected earnings release late Thursday. The jump brought its gain since its initial offering to roughly 1,100 percent. During the same period, the shares of Amazon.com rose 830 percent. Samsung, which makes smartphones as well as the chips that go into many other manufacturers’ devices, rose 760 percent. And Apple leapt a staggering 3,300 percent.

By comparison, the overall Nasdaq composite rose 120 percent, while Microsoft — 10 years ago the most feared giant in technology — gained just 28 percent.

“Companies away from Google and Apple and a few others increasingly have trouble communicating a value proposition” to shareholders, said Martin Reynolds, an analyst with Gartner. “Only a few big companies are starting to matter.”

These new leaders have focused on Web-based businesses. While the big money in technology used to be in selling to businesses, today’s leaders are oriented toward consumers.

Friday’s gain made Google, already one of the world’s most valuable companies, one of the few in which buying a single share costs more than $1,000. Others include Priceline.com, the online-travel company, and Seaboard, which processes turkeys and hogs.

In some ways, Google’s investors are betting that quantity can beat quality. Google’s challenge has been lower prices for the ads it puts on its own and others’ Web pages. Much of the traditional market for these ads has been saturated, and Google has been trying to put more ads on mobile devices like smartphones and tablets. Mobile ads tend to make less money because people click on them less often.

But Google executives have emphasized the enormous number of mobile devices on which it now places ads, and indicated that the sheer number of mobile outlets was set to keep growing.

Much of the growth in mobile was initially in the developed world, where ad prices are generally higher. As the use of smartphones and tablets spreads into developing economies, the revenue per user is likely to drop, affecting overall profits unless Google can grow even faster in these markets. For the third consecutive quarter, 55 percent of Google’s revenue came from overseas sources.

Google also appeared to be moving more money through overseas accounts and holding more money overseas, a strategy Apple and others have used to avoid corporate taxes in the United States.

Both Republicans and Democrats in Washington have criticized Apple for its offshore tax strategies. So far, however, the trend among companies seems to be increasing.

“The U.S. corporate tax rate is supposed to be 35 percent, and Google was paying an effective rate of about 15 percent,” said Colin Gillis, an analyst with BGC Financial. “It wasn’t like there was a massive reacceleration of Google’s business here.”

Google finished the quarter with $56 billion in cash, held in the United States and overseas. Even the companies trying to compete with Google are starting to draw off their overseas cash, buying foreign companies. These deals include Microsoft’s purchase of the phone assets of Finland’s Nokia for $7.2 billion, and Cisco’s purchase of NDS, a video services company based in Britain, for $5 billion in 2012.

Even eBay’s recent Bill Me Later feature is backstopped with its overseas cash, Mr. Gillis said. “If I was starting a tech company, I’d put it in Luxembourg so I could get bought with a U.S. company’s offshore cash,” he said.

Google’s United States business grew just under 13 percent over the quarter, a low number that analysts ascribe to a maturing business. Google is trying to increase the profitability of its ads by making them more personal, doing things like looking at where people are or what their previous habits have been.

On Friday, Google announced a new partnership with a rival, Facebook, in which it will begin selling ads that can appear on the desktop version of Facebook’s service. It also announced changes to location-based searches in international markets. While this yields more profitable ads for Google, since people are generally more likely to click on things targeted at them, it also can run afoul of privacy advocates and regulators.

Over all, Google’s quarterly numbers showed that its audience was spending more time on mobile devices. The traditional business of people clicking ads on desktop and laptop computers was flat last quarter, according to Search Agency, a digital marketing firm. Clicks on phones more than doubled, the research company said, while tablet clicks were up 63 percent.

Another bright spot in Google’s earnings, though a relatively small one, was Google’s “other” category, believed to consist mostly of sales to businesses of Google Apps, Google’s alternative to Microsoft’s office communications and productivity software. This revenue was $1.23 billion, an increase of 85 percent from the third quarter of 2012.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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