To market, to market to buy a fat pig. US GDP met expectations, earnings season so far has been OK, for some very good actually, I saw a swaps spread graph indicate that is at a two decade low (see here -> The taper is here to stay), but still, anxiety exists over emerging markets. And in particular the fragile five, of which we are a part, unfortunately. The term was coined by a Morgan Stanley analyst last August.
It does paint what looks like a far worse picture than what meets the eye, but if you need some background, check this NY Times article out: 'Fragile Five' Is the Latest Club of Emerging Nations in Turmoil. Worries about capital inflows slowing (it has already) and as such could suffer from fickle short term money. If foreigners decide that they no longer want to hold these stocks. Because somehow, somewhere, people in emerging markets will somehow stop consuming and working their way through the ranks.
Byron said it like it was, when someone asked him if the rate hike is going to have a big impact on consumer sentiment and shopping habits. He said snarkily that when people in Woolies heard of the rate hike they dropped everything and walked out. Thats it they all said, I am not buying food and clothes again. If you see in the New York Times story, the Jim O’Neill quote in that he still thinks emerging markets (the BRIC countries) are still the best investments. And he says that he gets irritated having to defend his thesis.
I suspect that the emergence of all of these nations will continue to mean that consumers globally long for better "stuff". Better packaged foods, better electronics, better living conditions, better transportation methods. There are examples all around us. So in so much that there are problems with regards to huge holes in our public accounts, living conditions for millions of South Africans are better. And that should lead to quicker economic growth, probably requiring some serious policy rethink. I wonder how many people have actually read the NDP from start to finish? If something is long and complicated, how is it easily implemented? Either way, hold on, keep calm, carry on.
Google reported numbers post the market last evening, these were for the full year and fourth quarter. Cash on hand, and this always amazes me, is 58.72 billion Dollars. As a percentage of their market cap it is around 15 percent. Nowhere near as high as the hardware manufacturers, like Apple and Cisco and the like, but not too dissimilar to Facebook, as you will recall yesterday. Whilst you could classify Google as a software company, they posses an enormous amount of hardware and patents for hardware. When did Google ever fall over and you were not able to search the internet? Never. Or perhaps a long time ago.
Google still focus on their Ten things we know to be true. It is really an awesome bunch of principles and simple enough for many small businesses to adopt. It is true that it is best to do one thing really, really well. Except that Google have many different businesses, but only one business that makes them a lot of money. And that of course is advertising. The future of advertising changed as we know it, whilst the three brains responsible for the formation of the company (Larry Page, Sergey Brin and to a lesser extent Eric Schmidt, more guidance that formation I guess) were intent on changing the access to information.
Before we dive head first into the numbers, Wiki has an astonishing fact about Google:
"Early in 1999, while graduate students, Brin and Page decided that the search engine they had developed was taking up too much time and distracting their academic pursuits. They went to Excite CEO George Bell and offered to sell it to him for $1 million. He rejected the offer and later criticized Vinod Khosla, one of Excite's venture capitalists, after he negotiated Brin and Page down to $750,000."
Ha-ha!!! I am not sure that Excite would have turned the same company into the success that it is today, but still, an interesting little factoid about the company. The company of course next to their main business has many irons on the fire of innovation, the much hyped Google Glass product, with quirky uses and other useful applications is not yet mainstream. The driverless car. Google wallet. The Nexus 7 tablet. Their Google fiber project of high speed broadband. The translate application that threatens to render language schools irrelevant. Recently the company bought Next, remember the piece from Byron a couple of weeks back? -> Google makes a big (little) acquisition.
Google revenues for their entire business, which included the loss making Motorola Mobile segment, grew 19 percent year on year to 59.825 billion Dollars. Net income grew 20 percent to 12.920 billion Dollars. On a share basis, basic EPS registered 38.82 Dollars for the year. Dividends, well, you know well that they do not pay any at all. Google, at a share price indicated at 1182 at the open (that would be a record high) is rated at 30 times earnings. Well, I suppose that may be on the expensive side, but the business is growing at 20 percent per annum. The trick is being able to attract more people from the traditional advertising (let us call it old) platforms to the new ones, the online ones.
Television still attracts an enormous amount of advertising spend. But that experience is changing already. Think of here locally where you can choose to watch your programs when you want to. Without the adverts, you get to watch your favourite program without the interruptions, the only "bad" thing is that you do not get to watch it in the same time slot. The internet is going in the opposite direction however, more and more people are advertising online.
The company has no debt. A big cash pile and the ability to make smaller acquisitions. They continue to keep margins at the same sort of levels whilst growing revenues, doubling roughly every 40 months. You are paying up a lot when you buy this business, but the company is a quality one. No. They are almost like the General Electric of last century, transformative businesses letting their customers determine the future direction. More than quality, iconic really.
Paul made an interesting point though, you must have read many articles of how Apple is finished or Facebook is finished, as absurd as it sounds. But you never read a story of how Google is going out of business, because their core product is synonymous with the internet. YouTube is an extension of that too. My kids for one know only Google and YouTube as a way to lookup "stuff". It is their library. And until that changes, it will very much stay the same. It will continue to grow and with very little competition of size and scale, the company dominates its core product. You do not say Bing it or Yahoo! it. At least not here.
The leadership issues are not cause for concern, those three (Page, Brin and Schmidt) committed to the business until 2024. Their vision still remains and the company has certainly attracted serious talent, who are in a sense given free reign to innovate and operate. This is a growth company printing growth in revenues, but has a multiple to boot. If you are patient with price action, wait for them to settle post this flurry over the next few days and then buy. And then own it. For a long, long time.
Home again, home again, jiggety-jog. Markets are mixed here at the open, but we are marginally higher this morning. I guess that with the emerging market rout it is not surprising that banks (down 10%), retailers (down 11%) and food (down 11.3%) companies are the ones that have borne the brunt of the selling. Industrials too. The overall market is down two percent year to date. The way that everyone has had their knickers in a knot, you would have sworn we were down the proverbial creek with the Victoria Falls roaring downstream. No. We are not there.
Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440
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