To market, to market to buy a fat pig. There was a Chinese rating agency which downgraded the US credit rating yesterday, yes, I kid you not, a crowd called Dagong Global Credit Rating. I guess in time these downgrades from an increasingly important China on the global economic scale will mean that the market might react more violently to these. But then again the Dollar (although weakening) is still King. The Euro is certainly attracting a lot of attention, it turns out that all the armchair experts suggesting that the economic bloc should separate, or throw Greece to wolves or any other such ideas were wrong. Wrong. But yet nobody takes those folks to task, because now they talk about being anxious about the next Fed move.
The shutdown of Government in DC and the debt ceiling being raised is now such old news. What always amazes me is that market participants are referred to as "investors". Let me make one thing clear, investors don't change their minds every ten seconds based on the news flows. As Paul also said, if you sold stocks because you thought that there would not a deal reached, then perhaps it is time to participate in another line of business. Really. Markets are about companies, and not about the Fed, even though interest rates matter to companies. Markets are not about the government, although policies matter to companies when they make investment decisions. But if you are going to make an investment, you cannot be doing it for a few days/weeks, right? Or am I wrong?
Anyhows, markets are making progress today, the relief (I am told) of politicians coming to their senses. Our local market is closing in on 45 thousand points. The S&P 500 closed at a record high last evening (1733) and the futures are pointing higher. Anxiety? It certainly did not seem like it. The other "big" news was that the Chinese economy in the third quarter grew by 7.8 percent. I guess that is pleasing, but the rate of growth has to slow as the absolute size of the economy grows. If you continue to grow at eight percent per annum, your economy would double every 8 years and 9 months, more or less. How is it possible that anyone expects the growth rates to remain at historically elevated levels? Recency bias must have everything to do with this. The expectation (humans are brilliant at pattern recognition) that the future will continue along in the same way that the recent past has unfolded is far easier to comprehend than earth shattering changes to look forward to. Meh, another look on another day. Talking of that and short term thinking, we have the non-farm payrolls being released on Tuesday. For the month of September, remember that the Labor Department could NOT get those numbers out, as a result of the shutdown, rather late than never!
Google reported third quarter results last evening after the market closed. You can download them and have a look here: Google Inc. Announces Third Quarter 2013 Results. Revenues and earnings top estimates. The business as we will discuss shortly is essentially an online advertising platform. As a customer, you get the ability to bid for space on the web, ahead of people offering a similar service. If you want to know what the real nitty gritty about this company and how it all works: Advertising on Google AdWords: An overview. You can have a lot more pointed advert to people who are searching for that very product or service. As you can see, this is very attractive to both sides of a potential transaction, as both a searcher and advertiser.
The numbers quickly for the quarter, those are important: 14.9 billion Dollars of revenue (the Google segment represents 92 percent of that), 10.74 Dollars Non-GAAP EPS for the quarter, 56,52 billion Dollars of cash on hand, which represents at the market close 19 percent of their market cap. Paid clicks increased 26 percent versus the comparable quarter last year, and 8 percent more than the prior quarter. Motorola continues to make a loss, registering an operating loss of as much as 248 million Dollars. I suppose that is "OK" when compared to the overall operating income for the third quarter was 3.44 billion Dollars. 23 percent of revenues, so you can see that the margins for a pure advertiser with some pretty nifty algorithms is a pretty good business! What we don't even mention and what they don't mention (except in the annual report) is that the Android operating system sits on roughly two-thirds of all smartphones. But two-thirds of all Android users don't pay for applications, that was some info I found, using a Google search. In the release the word Android is not mentioned. In the slide show it appears once. At least in the annual report it appears 13 times!
This business however is only 15 years old. And has been listed for only a little over 9 years, it is a young business, but is exceptionally well known for a business that is that small, possibly because it is synonymous with internet search. With a market capitalisation of nearly 300 billion Dollars and the wealth created for many over less than a decade, this is certainly an example of the new industrialisation of America. The name Larry Page, Sergey Brin (the founders) and executive chairman Dr. Eric Schmidt are household names, not only in America, but also across the globe in both tech and financial world. The name Google itself is a misspelling of the world googol, which as per the Wiki listing on the name: refers to the number represented by a 1 followed by one-hundred zeros. Or, 10 to the power of 100. 10100
In the very first founders letter Sergey and Larry had this to say about the company:
As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same. In our opinion, outside pressures too often tempt companies to sacrifice long term opportunities to meet quarterly market expectations. Sometimes this pressure has caused companies to manipulate financial results in order to "make their quarter." In Warren Buffett's words, "We won't 'smooth' quarterly or annual results: If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you."
Why is that important? Because it is. It really is. Jack Welch was accused of smoothing earnings, it suddenly struck me that I had read that last year, and then yes, I found it (using a Google search): GE's Jack Welch Knows About Cooking the Books. But that is another story entirely. Those three key individuals are very important to investors and to the company. In the annual report they are referred to on a first name basis. Plus, the three of them have 92 percent of the more important voting stock. There is a segment under business risks in the last annual report which is headed: If we were to lose the services of Larry, Sergey, Eric, or other key personnel, we may not be able to execute our business strategy.
Wow. So that is why there was all the fuss about Sergey Brin when found to be having a relationship with a Google British executive, whilst he was married. He still is, on both fronts. C'mon Sergey, C'mon. Eric Schmidt has been called a serial womaniser, with a whole string of mistresses. Wow. Larry? Well, believe it or not, Larry Page once dated Marissa Mayer, the Yahoo! CEO. I guess he has the better job. But should this worry you, or should you separate individual lives from the geniuses mentioned in the annual report as being key to executing their business strategy? What do you think?
Larry, Sergey and Eric effectively have 65 percent of the voting power. They will determine the way that the company is driven (driverless cars and the like) over the coming decades. You are essentially leveraging off their expertise and the way that they see the world and the trends unfolding in front of them. Google has many different businesses, but only one real contributor. Therein I think lies a big opportunity, that still exists. Driverless cars. Google glasses. The Nexus tablet. Google + and the app store, I nearly forgot to mention them monetizing YouTube, which my kids absolutely love! They have plenty of lines in the water, trying to connect the world and make information more seamlessly available. There is more and more daily. Cisco reckons that there will be 121 exabytes (28 trillion MP3's or 30 billion DVD's) in global IP traffic by 2017. Amazing. So there will be more to search.
The stock price in the aftermarket reacted positively to this earnings beat, I am pretty sure we will see some upgrades coming. In the aftermarket (premarket) Google is trading at 963 Dollars. Closing in on that 1000 Dollar mark. For as long as I can remember the stock looks expensive. You are always going to pay up for quality. We will continue to accumulate what is a high quality company that is able to continue to offer transformative services to their ever increasing customer base. The tip of the iceberg in terms of usage, that is the way that I look at it. Buy.
Michael's musings. African Investment Shopping
Yesterday Shoprite announced that they have retraced the decision to fire 3000 striking workers in Zambia, based on the government there threatening to revoke their trading licence. The back storey is that the workers were illegally striking due to wages and working conditions, Shoprite then issued two ultimatums for the workers to return to work before they fired them.
I agree that jobs are important, but as quickly as those 3000 people leave, Shoprite is going to have to hire to replace them; so how many jobs will actually be lost in the economy? The bigger problem is the message that the Zambian government is sending to international investors. As an investor do you want to put your money in a country that you are seen as the 'enemy', just out to exploit labour, in a country where your investment is not secure because government does as it will? I understand that from Africa's past, were Africa was exploited by 1st world countries, we are predisposed to seeing investors as the enemy, but that view needs to change, most of the other developing countries that we are competing with for capital, also have legacy issues with 1st world countries.
What African leaders need to realise is that we are living more and more in a global village, and if we are not competitive globally, capital will not flow into Africa. Why do we need the capital inflow? Capital allows economies to grow, which then hire all the unemployed people that governments are trying to 'protect', international investors also bring with them skills, which is almost more important than the money itself.
I am not saying that we need to let ourselves be exploited by international investors, and the way to avoid that from happening is by having laws. In the Shoprite case, Zambia has laws governing minimum wages and the conditions for striking, there are laws in place, let them take their course. For an investor, stability and certainty are more important than anything else, so rather have a higher minimum wage with the certainty that government will not interfere in the economy, than the uncertainty created by threatening to pull a trading licence.
Home again, home again, jiggety-jog. I saw this pice, amazing: Average 401(k) account balances nearly double since crisis. Doubled. and more importantly, people make mistakes around their retirement savings often with disastrous implications. So forget (for a second) the debate around the debt that the United States has, if people see their own personal retirement savings double in half a decade, how much more likely is that to make you feel? Positive of course. And the knock on impact. Markets are higher. More record setting here today. That is a good thing for you and I. We again ran short of time, the Google results trumped the other ones that we spoke about yesterday. But we will work on that and eventually get them to you!
Sasha Naryshkine and Michael Treherne
Follow Sasha on Twitter
011 022 5440
No comments:
Post a Comment