Monday, January 23, 2012

Is Google Destroying Value ?


On the 2nd Nov 2007, Google's share price hit an all time high of $711.25. Five years later, it stands at $585.99. In other words, the pin up company of the internet has managed to lose nearly 20% of its owners' money over the past five years.

The endless free and uncommercial services that blight the online business world are being paid for by shareholders. Every time you watch a YouTube video a Google shareholder is, effectively, putting their hand in their pocket to pay for your pleasure: the internet brought with it a raft of new business models (or lack thereof in many cases), and some were madly successful - such as Google's Adwords - but many others simply have not worked. Almost nothing else Google does makes money, and it has amongst the most obfuscated of core business metrics as well as business models.

In 2007 Google had revenues of $16.594bn and income of $5.084bn; in 2011 this had grown to $37.905bn with income of $11.742bn. So, even doubling the business seems not have returned any value to shareholders, suggesting that investors think that Google is a very poor investment and its business model a bad way of utilising capital.

Now, this has, of course, been a rocky period for any business, but the Apple share price has gone from $88 to nearly $400 in the same time and its revenues quadrupled. The Apple business model is very transparent and it is ruthless in not supporting unprofitable business lines.

In the more ruthless business environment we now operate in, it is worth asking if there is a place for companies like google on public market unless they start returning value to shareholders in the form of dividends, as Microsoft has had to do.

Equally, I'm longing for the day when bad execution of  unprofitable business models subsidised by deep pockets are no longer tolerated by shareholders and management alike.