Lecture
As the price of Google shares rises, investors are increasingly worried about whether to buy them. Observers and Wall Street experts advised investors to stay away from them. Google search resource was known to everyone, but now its shares were surrounded by a halo of mysteries. However, the independent financiers of Wall Street had different considerations on this subject. Bill Miller from Baltimore led the Legg Mason Value Trust, a mutual fund whose stock price has outperformed the stock exchange index for thirteen years in a row. Fat Miller, who was the father of Google’s founders, was looking for promising young companies and making big bets on them.
After reviewing the financial results of Google on the eve of the IPO, Miller realized that he was facing a powerful money making machine driven by search. Google was a young but very profitable company with a competitive edge and huge potential. She earned hundreds of millions of dollars annually, her sales grew by leaps and bounds - and this despite the fact that she was not yet seven years old. The company was getting bigger and bigger, and its growth rate was getting higher and higher. Google earned a lot of money in a relatively short period of time, and therefore had no debts. In addition, the main source of its income was advertising on the Internet - a fast-growing market. People spent more time on the Web, so companies rushed there in pursuit of consumers.
“We were only pleased that in the period preceding the IPO, the so-called“ SNA factor ”(fear, uncertainty of doubt) prevailed, which led to a decrease in the initial selling price of shares to $ 85, at which the exchange value of the company was approximately $ 23 billion , Says Miller. “The media reported endlessly that the founders were arrogant and inexperienced, that the two-class structure of shares smacks of bad internal company management, that the company does not provide all the information about its business, that it refuses to make predictions about its development prospects, etc.” Because of all the hype, Google’s stock price has fallen, but the fall has nothing to do with the company's long-term potential. “We believe that wonderful opportunities opened up for us then,” Miller notes.
At Miller's direction, Legg Mason acquired about four million shares of the company during an IPO, thus putting hundreds of millions of dollars at stake. The Miller Foundation, and previously interested in the World Wide Web, has already owned large stakes in Amazon.com and eBay, the two leading Internet companies that will soon celebrate their tenth anniversary. An ordinary investor, to whom the numbers in the company's financial statements speak little about, can only copy the steps of a financial keeper. For those who were impatient to find out whether it was worth buying Google shares, the acquisition of the Miller Foundation, made public in the fall of 2004, became a direct guide to action.
While others were in thought, Bill Miller was confident in the promising Google advertising model. Great changes were taking place in the business world: billions of advertising dollars flowed from traditional media to the Internet. And Google quickly found out how to make money in this new environment by becoming an IT company with a stable and profitable business. TV channels, newspapers and magazines for decades, "fed by" advertising, getting good profits.
Google differed from them only in that it operated on the Internet.
Many associated Google shares with ambitious Internet boom stocks. At that time, individual Internet companies also reported on large revenues from advertising, but they mainly placed advertising offers from other Internet companies. Google’s advertising dollars came mainly from thousands of small and medium-sized companies, many of which had not previously been advertised on the Web. Among them were both online stores and "ordinary" firms. Both Amazon and eBay are among the top advertisers for Google. Google also avoided those kinds of ads that users hated. She profited from text advertisements tied to words (phrases) typed in the search box. The system that she introduced was the exact opposite of the traditional marketing policy.Searching and surfing the Internet on Google links can be compared to driving on the freeway, in the course of which only those billboards open to the gaze whose contents are directly related to what you are thinking or talking about at a given time.
The scale of Google’s business model, as well as the hardware and software that made up its foundation, was impressive. Growing and expanding, the company continued to attract new advertisers. This provided cost savings, revenue growth and increased opportunities for all participants in the process - advertisers, web publishers, customers, and Google itself.
Another competitive advantage of the company that impressed Miller was the fame of its brand. No company has yet been able to achieve this level of fame without the cost of advertising and marketing. The network of partner sites has also become a major advantage: the Google logo and search box is present on the main pages of thousands of websites, including AOL, The New York Times and Univision. The wider the network, the more famous the brand.
Since Google delivers advertisements to the pages of thousands of large and small sites, on the Internet it has become something of an advertising agency. On the pages of partner sites, its advertisements are often (but not always) marked as “Gooooooogle Ads”. Google partners receive a generous share of the revenue from promotional offers, so they are interested in improving the company's financial situation. However, by sending checks to their owners every month, Google does not disclose information about how it determines the amounts payable. For reasons of competition, she also refuses to give out information on clicks on specific advertisements for the past month, and therefore web publishers can only take Google’s word for it.
Participation in this network is so profitable that many participating sites do not hide their enthusiasm. The first position in this list is Ask Jeeves - the embodiment of the success of Google. The cost of Ask Jeeves has risen sharply: by 2005, it had become a potential acquisition target, estimated at $ 1.86 billion. Almost all of its revenue is based on the fact that Google attracts advertisers and places their advertisements on the pages of the Jeeves website.
But millions of Google fans still did not understand how the company earns money if they do not pay anything for using its search engine. Many did not see the difference between the query results and the advertisements that appeared in the column to the right. Even those who saw this difference could not understand (because they clicked on advertising links quite rarely), how does Google manage to get billions of dollars in revenue - especially considering that the cost of a click is often measured not in dollars, but in cents.
Here, as in many other aspects of Google’s activities, it all comes down to pure mathematics. Since the search engine processes hundreds of millions of queries per day, to reach the level of quarterly profit, which the company reached in 2004, it needs to click every tenth or at least fifteenth user on a single ad (with an average cost per click of 50 cents).
If ordinary users found it difficult to understand how Google earns its billions, then Wall Street analysts were still puzzled by its unconventional methods. The company gave answers to millions of questions, but in certain things shrouded itself with a veil of secrecy. Unlike the overwhelming majority of other firms, it deliberately did not disclose information about projects under development and estimated quarterly earnings. Yes, Sergey and Larry were forced to bring Google to the stock exchange, but this did not mean that the company would reveal information from which competitors can learn about its future strategy. Three company executives did not get tired of repeating that Google would try to use any favorable opportunity for development, while remaining true to its mission.
Experts had to puzzle over a number of questions. What quarterly earnings will Google announce, especially considering that it previously stated that it works, focusing on long-term prospects? How will the market meet the shares that the company was going to bid for six months after entering the stock exchange? And what about the threat from Microsoft? In addition, because Google can not ignore the effect of the "law of large numbers." Even if the company will continue to grow, while receiving large profits, the moment will inevitably come when the pace of its development will slow down. However, Google, like its founders, was still young and ambitious, which greatly impressed Bill Miller.
During the first half of the year after entering the stock exchange, Google planned to lift restrictions on the sale of several million employee shares, which could have caused the market to overheat and, consequently, the stock price decline. On Wall Street, it was called an "oversupply" of stocks, talking about the possibility of changeable trading on Google stocks and sharp fluctuations in their prices. However, Google’s stock price was surprisingly persistent, and in October, just two months after the company entered the stock exchange with an initial share price of $ 85, it reached $ 135. Nevertheless, a number of Wall Street analysts advised investors. sell your shares, calling the sharp appreciation a “speculative fever.”
“The rapid growth of stock prices in such a short period is most likely unfounded,” said Mark Mahani, financial analyst at American Technology Research. The Google bubble will burst due to "high expectations" regarding quarterly profits, he warned. But after October 22, Google announced high sales and quarterly earnings, the stock price went up again.
And he continued to grow - contrary to the law of supply and demand. Immediately after the New Year, January 3, 2005, Google’s stock price for the first time exceeded $ 200, which was another milestone in the company's history. On February 1, the day after the company announced that its quarterly sales amounted to more than $ 1 billion, and quarterly profit to more than $ 200 million, the stock price rose to $ 216.
Google’s market value now exceeded $ 50 billion. It was worth more than many of the largest and most respected US companies. In terms of sales and profits, it was not equal, but because the stock price continued to grow: experts predicted that the company would continue to beat all records. But as far as the nearest period was concerned, there remained one problem - a “surplus” of 177 million shares, the company should remove the restriction on the sale on February 14, on Valentine’s Day. Even for Google it was a lot - at that time less than 130 million shares were in circulation. Accordingly, after February 14, this figure will rise to almost 300 million. In early February, Google’s stock price went down, dropping below $ 200. Shareholders could not understand whether they were just lucky so far and now they should sell their shares.whether this depreciation is a temporary phenomenon.
There were other difficulties. So, Google executives announced their intention to sell millions of shares owned by them. This statement was the subject of endless discussions and discussions in the financial press and caused concern among potential investors: they did not want to buy shares if Larry and Sergey sold them - even though the founders remained owners of almost all shares of the first issue, and sold only for to diversify your securities portfolio. At such an exorbitant price level, some skeptics on Wall Street hung a derogatory label on Google - dubbed the company a “pony of one trick”, hinting that all the revenue it brings is the only type of activity - advertising that is “tied” to the words in the line request.However, Wall Street analysts had to revise their forecasts for Google’s stock price as it grew, although they complained that they didn’t have a clear idea of the real value of the stock, because the company stubbornly refuses to provide them with relevant information.
On February 9, Google opened its doors for the first time to Wall Street financial analysts who came to Silicon Valley to meet Larry, Sergey and other top managers of the company. It happened in a matter of days before the same 177 million shares had to enter the market. The purpose of this meeting was to transfer to interested parties more detailed information on the eve of the most important, in the opinion of Eric Schmidt, events in the life of the company. He understood how important it is for Google to open up a bit, and also to survive this day on the stock exchange without excesses that could shake the company's trust.
The meeting began with optimistic statements by Schmidt. “Our advertising network is surprisingly slim and harmonious,” he noted. - We have a very wide range of advertisers. We are independent of any industry or specific advertiser. This state of affairs was largely due to the concept, called the "long tail". "
She proceeded from the fact that in the Internet era, spatial barriers no longer have the same meaning as before, because cheap delivery allows targeted products that meet specific needs to attract large masses of consumers. It turned out that the most popular books, songs and films make up a surprisingly modest share in the sales of Amazon, Netflix and other online stores, the rest falls on the “long tail” of the so-called “shadow favorites”, which, thanks to the Internet, has now become easier to find. In the case of Google, this concept has covered a wide range of companies that paid for its right to advertise on the pages of a search resource.
“What is striking about this concept is how really long this tail turned out and how many small companies do not have access to the mass market,” Schmidt said. - In the middle of the tail things are going very well with us. So far, we do not have products and services that, in our opinion, are necessary in order to serve the largest or, on the contrary, the smallest advertisers. But we are working to provide high-quality “tail” service along the entire length. ”
Schmidt made it clear that Google’s advertising model and business model have great potential for growth, and that the company plans to reach Fortune 500 advertisers in 2005. “We’re not as unconventional as we say,” he said. - What we do is unique in terms of software development, but otherwise we are little different from others, because we act, though in a modern, but still traditional way. We closely monitor financial results. And every quarter we go through a procedure called “Well, how are things going?”.
So, Google is not indifferent to its financial results. Simply, having so many talented mathematicians and programmers, she approached the process of developing innovations rather as a university, and not as a traditional company. As for managerial and financial resources, they, Schmidt explained, are distributed in the ratio of 70:20:10 - i.e. 70% are invested in information search and advertising (core activities), 20% - in related products and 10% - in completely new ideas, in the future. “We put the main types of activity at the forefront because it is they who bring in money, customers and turnover,” he noted. “As for 10%, we have a group of experienced developers and brand managers who know how to turn brilliant ideas into products that will be in demand.”
Finally, after hearing what they wanted to hear, analysts began to look forward to meeting with the founders of the company: after all, despite all the assurances of Schmidt, they were the holders of a controlling stake, and therefore more than anyone, influenced Google’s strategy and management.
Bryn said that he focused on motivating and attracting the best and most talented professionals in the world. Having turned into a joint stock company, the company needed new financial incentives. To stimulate innovative projects, Google has established a “pioneer award”, stakes in the amount of several million dollars, which will be awarded to teams that have offered the best ideas. Such a large premium for most companies was unheard of. The main goal pursued by Google was to save brilliant innovators so that they developed their ideas on the Googleplex, and not anywhere else.
Page noted that he devotes most of his time to working on new products and improving existing products. Quality search results and relevant advertisements have been delivered to millions of people thanks to Google’s tremendous computing power. “We are trying to manage the business as efficiently as possible, and we are doing all this in order to earn big money,” he said. “But we are not going to make money on everything we have.”
Financial analysts left Googleplex with satisfaction. Schmidt is a professional, Brin and Paige are serious adults, and therefore Google shares will continue to grow in price. Analysts do not seem to have been bothered by the fact that Brin, Page and Schmidt are going to sell shares worth hundreds of millions of dollars. They decided to diversify their investments, and this is their right. In any case, a block of shares worth several billions will remain in the hands of the founders.
By May 12, when the company held its first annual shareholders meeting at the Googleplex, Google stock price exceeded $ 225. A few weeks earlier, she announced excellent financial results for the first three months of 2005: profits rose by as much as 600% to $ 369.2 million, and sales reached $ 1.3 billion. For several hundred shareholders, took part in the meeting, the company organized a lunch. The rest - including representatives of the media who were not allowed to attend the event - watched the webcast from the main conference room.
First on the list of participants was Jeff De Kanya, a major shareholder, a consultant from Washington. He was impressed by how skillfully Google organized the meeting, by not allowing shareholders to disperse across the complex’s territory - any of them could be a spy for a competitor. "I intend to continue to acquire shares of Google," said De Kanya. - In my opinion, even $ 200 per share is cheap. Great companies believe in innovation and invest in it, because it is the key to success. If Google stays true to its style of management, the stock price may well reach a thousand or even two thousand dollars. ”
By June, Google shares have already been gossiping to all and sundry. The company's stock price was approaching $ 300, and its market value already exceeded $ 80 billion. Wall Street news even overshadowed the news of Larry and Sergey being elected honorary members of the American Academy of Art and Science. On the cable channel CNBC, daily transmitting stock reports, the price of Google shares was demonstrated along with DJIA, the index of blue chips of the American stock market. The world, with bated breath, waited, when Google shares, which less than a year ago went into circulation at a price of $ 85 apiece, would reach the level of $ 300. “No company today is as popular as Google,” wrote the Financial Times. - Even a little trouble or a slight decrease in the growth rate of income will cause a drop in the price of its shares. Does it matter? Probably,no - in any case, as long as Google remains an independent company. But those who take her quotes too seriously risk making a big mistake. ”
The barrier of $ 300 Google overcame in the week preceding Independence Day (July 4). Mark Mahani, a Wall Street financial analyst who advised investors to sell the company's shares in October 2004, when their price reached $ 135, now predicted a further rise in its stock price - up to $ 360. Other experts also tended to Google will grow. Like the search engine that fueled them, Google shares began to live their own lives.
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History of computer technology and IT technology
Terms: History of computer technology and IT technology