Stock Talk

Today Google announced its latest set of financial results.  Not too shabby, either. Google's also splitting its stock by way of introducing a new class of shares. It sounds all complicated and stuff, but it’s really no big deal.  I’ll do my best to explain it in plain English for everyone.

First let’s look at Google’s results:

Google generated $10.65 billion in revenue for the first three months of 2012. That’s a mighty healthy 24 percent growth from the year-ago period. Operating income was up 32 percent.  Earnings per share (EPS) was $10.08, compared to $8.08 last year. In case you see headlines highlighting different earnings per share, keep in mind Wall Street usually cares about the “non GAAP” earnings, which is what we're talking about here.

The financials tell us that Google is growing at a good clip, and earnings are keeping pace with revenue growth. All of that is good news. Considering how dominant Google is in search and content advertising, it’s not like we were expecting profit margins to shrink. 

The stock market likes the numbers so far. The $10.08 in EPS compares to Wall Street expectations of $9.64. Google stock was trading up about 3 percent in after-hours trading.

Not your usual stock split

Google is an “expensive” stock at over $650 per hare. So it's splitting the shares 2 for 1. Keep in mind that the price of a share has absolutely nothing at all to do with making it expensive or cheap.  The price of one share tells you nothing unless you know how much of the company it represents. 

A stock split means a single share becomes two shares. The price of the stock will drop in half as a result. It’s the equivalent of cutting your piece of pizza into two. You still have the same amount of pie. No biggie. It just looks less expensive to retail investors who want to feel they’re getting a deal.

Google actually is creating a new class of shares, too. So if you have a share of Class A stock (with voting rights), you’ll now get one new share of Class C stock.  The new class of shares has no voting rights. Sergey, Larry and Eric don’t end up with any more voting control as a result of this.  Unless I’m missing something, I don’t see how this new share structure changes anything. (We'll learn more when the full proxy documentation is released.) So for now, let’s move on.

Very little Android info on the conference call​

Google didn’t throw any new metrics at us. CEO Larry Page reminded us of Android’s 850,000 daily activations number. But that’s from late February. Some might consider it a mild disappointment that the number isn’t higher after another month and a half of time to grow. But it's hard to argue that Android activations make Google the clear leader in the smartphone OS. Page commented about how the OS is “pretty important,” and there have only been a few leading OS developments in his lifetime. I completely agree. There also were several reminders about how Google's leadership runs the company with long-term goals in mind, and not necessarily quarter by quarter.

Especially from Google’s perspective, I think winning the OS battle matters a lot. Other operating systems don’t need to bake in Google apps, and therefore don’t need to bake in Google advertising.  Even an alternative OS that does bake in Google apps may strike a deal to be treated much like an AdSense publisher. The OS maker expects a cut of the revenue.

So, Google’s interest in controlling the OS helps it keep a larger chunk of the revenue pie. This is important as more and more mobile advertising will take place outside of the browser.

Oh, and finally ... there no new info on a Google branded tablet


Chris Umiastowski is a former sell-side equity analyst at Orion Securities and TD Securities. Before that, he was an engineer for Nortel Networks. Chris is co-host of the Mobile Nations Stock Talk podcast.

 
There is 1 comment

icebike says:

Sergey, Larry and Eric don’t end up with any more voting control as a result of this. Unless I’m missing something, I don’t see how this new share structure changes anything. (We'll learn more when the full proxy documentation is released.)

You are right, they don't get any more control. But they don't get any less either.

But what this does is allow them (as well as any other stock holder) to sell off the newly split shares of non-voting stock, and STILL retain the level of control they had before.

Typically, when you buy shares in a company, you expect to be able to vote for major issues or the board of directors. (And in the case of most companies, most of us small fry expect our vote to be meaningless in the grand scheme of things).

When the major stock holders sell off their non-voting capital stock, they theoretically own less of the company.

But they still have the same number of voting shares. So they still control the company the same way they used to. And they control it by voting the same number of shares. Its just that they filled their pockets with the proceeds of selling off their non-voting shares.

Having the cake and eating it too!

This is neither new or unheard of, although it is not the norm. Its been legal since about 1927, (when these non-voting shares were called "banker shares".)

Most people don't vote anyway, just the big institutions. This allows those small-fry investors to earn money on the growth of Google, by buying cheaper shares, and selling them in the future. But they get no say in any company business.