Google: Three Ways to Unlock Shareholder Value
With Google’s (NASDAQ: GOOG) stock up more than 20% in the last month, there probably aren’t too many investors complaining. That being said, prior to the company’s last earnings report, the stock had been essentially flat for 2015. In addition, since the spike in the stock, it has given back just over 6% of the initial gain. Long-term investors need to constantly reassess what Google can do to improve its fortunes. At this point, there are three specific actions the company could take to further reward shareholders:
Increase Segment Transparency.
The first way Google could enhance shareholder value is by breaking out the value of its “Other” businesses. This division generated $1.7 billion in revenue, which represents an increase of 17% annually. Google’s CFO Ruth Porat said on the conference call that the company witnessed “substantial growth in [Google] Play.” The challenge is investors aren’t being told what exactly is driving the growth in Google Play.
Facebook (NASDAQ: FB) breaks out its revenue into “Advertising” and “Payments and Other Fees.” Facebook investors who see the potential behind the website as a retail platform know that payments represent just over 5% of the company’s revenue. In the same way, Google should begin to report Play separately from its “Other” category.
Microsoft (NASDAQ: MSFT) breaks down its Consumer & Devices revenue into sections such as, Surface, Xbox and Search. For investors who are excited about the huge growth in the Surface lineup (revenue up 117% year-over-year), they know that this product represents just over 10% of the Consumer & Devices division.
If Google’s competition can break out divisions that represent less than 5% of revenue, then Google can (and should) give investors more information on its Google Play service. Huge growth in YouTube seemed to propel the stock higher and additional detail on Google Play could help unlock additional value.
Speaking of YouTube, this business is another of the great mysteries of Google. It seems likely that YouTube is the company’s fastest growing segment. However, just like Google Play, investors are left to guess about how well the service is doing.
When it comes to search, Google gives investors detailed measurements. We know that paid clicks increased by 18%, and the Cost per Click declined by 11% annually. When it comes to YouTube we know that watch time, “is now up over 60% year-over-year.” Even more important for investors, “Advertisers running video ads on YouTube is up more than 40%.”
The fact that Microsoft’s Search & Advertising division reported a 21% increase in annual revenues should worry Google investors. By comparison, Google Sites revenue increased by just 13% year-over-year. In addition, Facebook said that it now sees 1.5 billion searches per day through the site. If Microsoft and Facebook are stealing searches away, knowing specifics about YouTube becomes even more important.
On the valuation front, Google currently trades for just under 6 times projected revenue for 2015. By comparison, Facebook trades for roughly 15 times revenue. Google is expected to grow annual EPS at almost 3 times the rate of Microsoft, yet even Microsoft fetches over 4 times sales.
Estimates of YouTube’s revenues vary, but Morgan Stanley suggested the site could do $20 billion in revenue by 2020. Given that in 2012, the site did an estimated $4 billion in revenue, this would suggest a better than 20% annual growth rate. If YouTube is growing fast, and is mentioned as a primary driver of Google’s growth, why not give hard data to investors?
A more explicit way to drive the value of YouTube to investors would be to spin-off the division. EBay split from PayPal, so that both could focus on their growth potential. YouTube and Google could split, and lock down a multi-year deal to do business with each other.
The combined market cap of eBay and PayPal is about $81 billion. Just a few months ago, the value of the combined company was under $70 billion. Splitting the company in two, generated more than a 15% increase in the shares’ value. The fact that YouTube is projected to grow faster than PayPal, suggests its shares would be highly prized in today’s market.
Issue a Dividend.
The third way that Google could unlock additional value for shareholders is, by releasing some of its cash pile as a dividend. The company’s net cash and investments grew by nearly 11% annually, to just under $68 billion (N.B. Apple has over $203 billion in cash). In addition, Google generated $2.4 billion in core free cash flow (net income + depreciation – capex) last quarter.
Facebook is a much smaller company in terms of revenue, so a dividend doesn’t make as much sense. Microsoft has been paying a dividend for several years. Ironically, Microsoft is sitting on almost the same amount of net cash and investments as Google today. Microsoft’s core payout ratio is about 50%. Even if Google went with a conservative payout ratio of just 30%, this would equate to a dividend of more than $8 annually per share.
A yield of about 1.3% based on today’s prices, would show investors the company is serious about maximizing shareholder value. In addition, this yield would allow income investors to consider adding Google to their portfolio.
Google is an impressive company, but its shareholders aren’t being given the opportunity to make an informed decision about its full potential. Breaking out Google Play’s growth and revenue would help. Spinning off YouTube would be a transformative event. Using some of the company’s cash to pay a dividend, would likely unlock additional value as well. The bottom line is, Google is doing well, but investors have the right to expect more.
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