This is part 2 or 3 of my illustration of the gross misvaluation of Google (see My Thoughts on Roger McNamee’s View of Google and Mobile Computing). As a reminder to our paying subscribers, on November 2010 we downgraded the stock to Neutral from our Overweight stance while maintaining our valuation. Given the market’s reaction to the stock and the fact that growth was ahead of our expectations, we upgrade the stock back to Overweight territory. The full, unabridged quarterly review is available to all paying subscribers here: Google Q1 2011 results. Below are many of the salient points contained in said download.
Google Q1 results
For the quarter ended March 31, 2011 Google reported gross revenues (before traffic acquisition costs) of $8.58bn, an YoY increase of 26.6% and QoQ increase of 1.6% while net revenues (after traffic acquisition costs) increased 29.1% YoY and by 2.6% sequentially to $6.54bn. The YoY growth in gross and net revenues was the highest at least since 2008 demonstrating a increasingly momentum in the growth of Google’s digital ecosystem. The increase in net revenues (after TAC) was actually stronger than the increase in gross revenues, indicating that Google has not only packed in growth but lowered aggregate top line expenses.
However, despite a strong set of results the stock took a severe beating and was down c8% as the results were short of analyst expectations. The market’s reaction to Google’s numbers clearly reflects the very myopic view of US public markets wherein a stock is dumped if it fails to beat consensus – even when this view clearly overlooks the broader picture.
A few readers have asked me to address Roger McNamara's comments on CNBC, not to mention the drop in Google's share price after earnings. I will split the response into several posts since it is the weekend.
Well, to begin with, I agree with his bullishness on tech and his premise that although it may not increase as a % of GDP in the near term, mobile computing has a lot of growth to run with. As for Google, it has expanded far beyond search and owns the most prominent and fastest growing mobile OS in the world, as well as controlling advertising on said platforms as well as the main video site. It is well positioned. As for the comment about nobody makes money from Android, well those entities that make money from Android disagree. I have outlined this in the first quarter, reference Apple Gears Up To Combat The Margin Compression That Apparently Only It, Google & Reggie Middleton Sees Coming Monday, February 14th, 2011
On January 20th, I posted "Blackberries Lost More Market Share Than We Bearishly Anticipated While RIMM’s Share Price Spikes: Is It Time To Revisit the Bear Thesis?". I turned bearish on RIM last summer and made some money on its dip back then. Shortly afterward, its shares did the QE thing, despite the fact Android started sucking up market share everywhere while simultaneously squeezing margins like orange juice. As excerpted from the aforementioned post:
We have updated our mobile OS and handset manufacturer market share model and will make it available to subscribers as an online app by next week. In the meantime, let’s review some of the findings – vendor by vendor. First up is Research in Motion. This was a profitable short in 2010, with the share price hitting our targets within 100 pennies. Since then, the stock has risen appreciably. Let’s take a look to see if the rise was justified.
Page 5 of our Research in Motion forensic analysis (released in the summer of 2010 - RIMM Forensic Analysis and Valuation – Professional & Institutional or RIMM Forensic Analysis and Valuation – Retail) clearly stated that while we expected RIMM’s handset shipments to rise as a result of a rapidly expanding smartphone market, it will lose considerable market share....
As it turns out, it appears that we were erred slightly to the optimistic side with an 18% market share estimate for 2010. By the end of the 3rd quarter, RIM has fallen to 15.3% according to information calculated from IDC, and its decent has accelerated far faster than even we (the bears) have anticipated – a full 350 basis points for the quarter. This is 6x the decent of last quarter and 7 x the decent of the quarter before that. It is quite safe to assume that they will be materially below this point at year end (the data that we crunch is lagged by a quarter). This market share loss is most assuredly caused by the outsized growth of Android, which I will demonstrate in a minute. Below are charts generated from an updated version of the subscriber document Smartphone Market Model – Blog Download Version:
Last month I said that "The (Very Near) Future of Microsoft Windows Is Here, Now!", lamenting on how impressive Microsoft's new computing and gaming interface was. For those of you who are not familiar with the Kinnect technology, I strongly suggest you review the contents behind the link. It is truly amazing, particularly considering it has already been hacked onto Windows 7 and individual computer applications for the "Minority Report" effect.
Well, it appears as if I was correct, for Microsoft has surprised the investment community once again by posting not on a 5% rise in revenues but a 55% rise in the revenues of its entertainment divisions - a division that has been widely known to be a money loser. The Xbox franchise is arguably the most valuable gaming franchise in the world, and the Kinnect has lit it on fire. The possibilities for this stuff is quite significant as it matures and gets refined. Imagine controlling all of your devices with gestures and voice commands!
Of particular note is the fact that Microsoft's consumer businesses are nearly on par with that of their enterprise divisions, approximately 7% in difference (after reversing deferred revenue recognition). This marks a significant change in Microsoft's revenue mix, and it is not going unnoticed. There is no wonder why Microsoft is moving Windows to ARM architecture, to better compete with those guys from Apple and Google.
Looks like the rumors were true: Microsoft has just confirmed that the next major revision of Windows, what we'll call Windows 8 for now, will include ARM support. The company also is throwing a little love to all the system on a chip (SoC) makers out there, indicating they'll be getting support out of the box as well. This is the sort of thing we've come to expect from Windows Embedded, but it's something new for the company's flagship product, and is something of a continued sign that the concept of a "personal computer" is only going to keep changing. Full details are in the release after the break, but be warned those details don't include anything even resembling a date. There are, however, about a zillion quotes from companies like ARM, which says:
Windows combined with the scalability of the low-power ARM architecture, the market expertise of ARM silicon partners and the extensive SoC talent within the broad ARM ecosystem will enable innovative platforms to realize the future of computing, ultimately creating new market opportunities and delivering compelling products to consumers.
This more than mere marketing and PR fluff. See my thoughts, in detail: The Future of the Mobile Computing Wars: Contiguous Rich Client Computing! While it is perfectly understandable to want to prevent Apple from gaining too strong a foothold in the tablet market, I think many vendors are incapable of seeing the forest due to excess tree bark in their eyes. Consumers and business users are expected to purchase a smartphone, desktop, notebook, media player and now a tablet? Realistically, many of use have replaced the desktop with a notebook, and the media player with a smartphone (and the trend indicates that will continue), but the question still stands if there is practical room for a notebook, smartphone and tablet. The only device that is a definite at this point is the phone, and the notebook and tablet will probably converge. Suppose some company beats the others to the punch on that convergence? The secret lies in the cell phone and that is where the next set of BoomBustBlog forensic analysis will focus.
This should be interesting, for to have a full blown Windows computer running on a phone or tablet, with no compromises in terms of actual productivity (read as being able to use the full Microsoft Office suite) considerably changes the game in mobile computing. Don't say I didn't tell you so, reference Don’t Count Microsoft Out of the Ultra-Mobile Computing Wars Just Yet and After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play.
What is even more exciting is the fact that this will cause Apple and Google to REALLY kick it into overdrive, for as cool as their products are, they don't touch the depth, functionality and usability of the suite of core Windows applications. The mere threat of Microsoft being able to move that functionality to a true mobile platform is an incentive for them to truly innovate.. In addition, look for the power of a chip to truly adhere to Moore's law again, if not better it, for Intel must be feeling the pressure by now and they have yet to move their low power contender (the Atom chip) onto the newer technology fabrication processes. Since it is clear the company is not daft, this probably means they have something strategic up their sleeves to combat the loss of near exclusivity of the Wintel deal (with Microsoft courting ARM architecture), probably the most powerful, profitable partnership in the history of computing. One would assume that Intel will move into low power consumption chips in a big way, for although the margins are much lower than server chips, et. al., they cannot afford for the Nvidias of the world to gain a foothold in what was the desktop domain.
From the Microsoft Press Release:
Additional evidence of Google being in the forefront of the convergence of media, telecomm, the Web and computing (a position that may very well be ephemeral, but a pole position in which we feel Google currently occupies), executing along nearly all of its major business lines as well as its key entrepreneurial pursuits have been phenomenal as it succeeds in knocking the ball out of the park again. I turned very bullish on Google in the summer of 2010, while it was trading in the $400s and have invested a significant amount of resources in analyzing this company's prospects (see Navigating BoomBustBlog Subscription Material To Find The Google Valuation Drilldown).
I believe most analysts and investors still fail to understand the ramifications of Google's longer term investments. This is exemplified by Google being able to perform so far past analysts estimates for two consecutive quarters despite explicit evidence that they have both expanded their core business and successfully created several additional, distinct and diverse, multi-billion dollar business lines (see Google’s 3rd Quarter Operating Results: The Foregone Conclusion That Was Amazingly Unanticipated by the Street!!!). Kudos go out to management for having the balls to think long term as a public company in an environment where quarterly results are the be all and end all. It is paying off.
As far back as 2009 (yes, over a year ago) I have been warning readers and subscribers of the (not so) hidden risks of putbacks, warranty and rep reserves, and the overly optimistic under reserving of the big commercial banks. I used JP Morgan as an example (see link list below), but made it clear this warning stood for several big banks (several of the big banks - As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves, As a matter of fact I said that the banks 'May Become The “New” Tobacco Companies' due to legal risk. This risk was significantly exacerbated the day after making that post, Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB! wherein the Massachusetts Land Court Decision that invalidates foreclosures based on post sale assignments was up held by the Massachusetts Supreme Court. This is permanent, and precedent setting, absolutely justifying and vindicating my post from the day before and clearly demonstrates that The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
I know many find this to be sensationalist, but they also found the bombastic posts of 2007 to be sensationalist as well, that is at least until 2008! We have mortgage situations where the actual BANKS are walking away from home, see I Warned That Banks Will Soon Be Forced To Walk Away From Homes… Guess What! Now, tell me how much the mortgages are worth behind abandoned houses - houses that were abandoned by both the homeowner and the bank? Although these are minority occurrences, I see them spreading away from the fringes and closer to the core as the economics of foreclosing on certain properties makes less and less sense in an increasing number of situations. All of this ranting and raving is simply to provide a background for the not so surprising development in the latest Bank of America quarterly earnings announcement. From Bloomberg: BofA Reports Loss on Costs Tied to Bad Loans, Mortgage Unit:
Goldman Sachs posted a 53 percent decline in quarterly profit, due in large part to the reversion to mean of their outsized trading profits over the last several quarters - as duly warned in the BoomBustBlog research reports. As per CNBC:
Fourth-quarter net income after payment of preferred stock dividends totaled $2.23 billion, or $3.79 per share, compared with $4.79 billion, or $8.20, a year earlier. Net revenue fell 10 percent to $8.64 billion.
Analysts on average expected profit of $3.76 per share on revenue of $9 billion, according to Thomson Reuters I/B/E/S.
Net revenue dropped sharply, as we anticipated as well.
Net revenue in fixed income, currency and commodities slid 39 percent from the third quarter to $1.64 billion, reflecting what Goldman called "generally low client activity levels."
The Goldman, et. al. story is not over yet. There is still a material amount of legacy assets (losses) to be recognized at market value. The market is not returning to the point of inception of this stuff, and the true extent of the losses have yet to be taken. I have been uber bearish from this perspective, yet market prices appeared to disagree. The problem was simply a matter of gross, coordinated misrepresentation (a fancy way of saying "lying, on a large scale - and with the cooperation of regulators"). I was absolutely correct, and now that the truth has come out, will there be any rule of law? Let's reminisce through referencing several posts from 2008 wherein I made clear that Goldman Sachs was much riskier than practically ANYBODY on the street and in the media recognized...
Summary: A full analysis of the grand slam Q3 earnings performance that was anticipated in full detail by BoomBustBlog, yet took the Street by surprise.
Google hit the ball out of the park with their latest earnings release, yet I feel the gist of their success is missed by many. Although Google was able to increase revenues and profits on expanding margins (a win, win, win situation), what is most impressive is that they were able to do it while simultaneously investing in very high risk/high reward ventures. Google TV, Android, YouTube and AdMob are the ones that come immediately to mind. Android alone threatens to, and actually is, disruptively transform the entire ultra mobile and mobile computing space. The potential of Android coupled with Google's ad revenue subsidy prowess and plethora of cloud services is not only quite formidable but obviously the wave of the very near future - a future that Google is more apt to dominate than most of the technology powerhouses of today.
- Google Valuation Model (pro and institutional).
- Smartphone Market Model – Blog Download Version – all paying subscribers
- Mobile Operating System Market Share Model – all paying subscribers – This model is key to showing the trends across operating systems, and not just handset manufacturers.
As is customary, I am excerpting a generous swath of the subscription report (sans updated valuation) for free distribution on the blog...
Summary: Morgan Stanley is also extending its abysmal track record in CRE with the 97% in Revel. The bank took an effective loss for the common shareholders, even when backing out the DVA effect (which is a non-cash charge) as long as you normalize one time items. There is plenty more pain in RE to come, and Morgan's track record is horrendous at the same time expenses are rising with talent fleeing.
The Morgan Stanley Q3 2010 forensic report and updated valuation is now available for download to all subscribers - Morgan Stanley Q3 2010 Analysis and Updated Valuation. I will be exporting strategic portions of the model for pro and institutional subscribers over the next few days which will allow a forensic view of the balance sheet holdings. Below is an excerpt of the report, as well as some links to the mainstream media's reporting of Morgan Stanley's quarterly results to allow subscribers to discern the difference in both our approaches and results.
Mainstream Media's Reporting of Morgan Stanley's Q3
- Marketwatch, reposting the Businesswire release
- Businessweek on the same
- and Zackr's Investment Research, which actually is an analysis firm, and not a news reporting agency
The BoomBustBlog Way
I have taken the liberty to excerpt a few paragraphs for those that don't subscribe in order for you to ascertain the difference between reported news and analysis. Feel free to click on any page to enlarge to print quality size.
"Goldman, unlike the rest of the street and practically the rest of the I banking world, is ratcheting up off balance sheet risk!!! Is BoomBustBlog the only one inquiring as to WHY??? We have a few reasons in mind... And to think, many thought the Enronesque days of off balance sheet "hide the sausage" games have come to an end..." Go through your sell side analyst's quarterly update and if you don't find these tidbits of information thoroughly explained, but instead see a Goldman fan boy(girl) cheering section, come back and subscribe to BoomBustblog. At the very least, we tell it like it is!
My opinion and updated valuation for Goldman and its 3rd quarter performance is available for download to all paying subscribers: GS 3rd Quarter 2010 Update. While I can't spill the beans on the entire contents of the subscription document, there are a few issues (as usual) and observations that I would like to make public.
To begin with, I must commend Goldman's management. They do a helluva job massaging numbers and attempting to right their ship, particularly in relation to some other banks. Anecdotally, I'm aware of their losing some talent on the equities side but I am sure they have no problem replacing it. There is also the issue of their subprime servicing unit, Litton Loans, which I am sure will bring them nothing but heartache in the near to medium term, but at least that aspect of the business has been recognized by the sell side, if not under appreciated in terms of potential risk. Despite its small size in relation to Goldman's aggregate operations, it carries with it material reputation risk as well as the prospects for significant litigation and more.
Now, on to the aspects which the sell side decided not to cover - or somehow overlooked. Goldman was applauded for having strong accounting earnings. In Four Facts That BANG JP Morgan That You Just Won’t Hear From The Sell Side!!!, I warned of the danger at looking at accounting earnings as if they were actually a legitimate barometer of a companies actual economic value. If that were the case, wouldn't accountants be the best investors in the world? I will delve into the folly of relying strictly on accounting earnings later on this missive as well, particularly in regards to a company with management as crafty and capable as Goldman - but before I do let's realize that even those accounting earnings were down significantly from previous periods...