Mountain View has been a prime example of the long-term play
Google went public 10 years ago today. I remember it well because, at the time, I was working as an equity analyst covering the technology hardware sector on Bay Street in Toronto. When IPOs happen, the investment bankers typically are the ones who set the offer price. Google used a Dutch auction, which was controversial and meant buyers were to bid on the number of shares they'd like to buy and what price they'd be willing to pay.
Google's IPO was not deemed highly successful at the time. The Nasdaq was suffering from weakness, the first-day pop of Google shares was less dramatic than people hoped for, and it was commonly written that Google was massively overpriced.
Ten years later I think this serves as fantastic evidence of the importance of long-term thinking. Investing, to me, is not about trading for today, this week, this quarter or even this year. It's about looking at an industry dealing with huge change and buying companies with a leadership position in creating the change. Oh … and holding onto the stock for a long, long time.
Seeing the forest for the trees remains as important as ever.
Part of the reason I believe investors can earn superior returns using this strategy is because industries often change much more than we could ever have anticipated. Bill Gates said "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10." I think he was right, and Google is an excellent example of this, along with Apple, Netflix, Priceline Group, Facebook and plenty of other growth stocks that lead their markets.
When Google went public there was no YouTube and it was practically impossible to do anything data-centric on a mobile device. There was no Android, and most people didn't expect us to move so heavily towards mobile technology. We also probably didn't think that, ten years later (today), Google would look interesting because of wearable computing or self-driving cars.
But even with all that's changed, Google is still primarily an advertising business. AdWords and Adsense are still the big drivers of revenue. They've just gotten a whole lot bigger.
In 2003, the last full year of financials prior to the IPO, Google posted $1.47 billion in revenue and $0.41 of earnings per share (fully diluted). In 2013, the company's most recent fiscal year, revenue was $59.8 billion with diluted earnings per share of $38.13. Keep in mind that Google's stock split in 2014, so the numbers I just gave you do not require any split adjustment whatsoever.
So in 10 years, Google grew the top line by 40 times, and the bottom line by 93 times. This means the company not only got a lot (a LOT) bigger, but it's profitability ratio improved dramatically. And the company is still growing, still dominates search, and still has incredible opportunities considering how many corporate advertising dollars are likely to move to online/mobile formats and away from print media.
A shift from focus on profits to growth isn't out of the question, though.
Google has spoiled investors who like to see profitable growth because it has so regularly posted such profitable growth. Contrast this with a company such as Amazon, which doesn't show much profit at all. It never really has because Jeff Bezos and his team see so much growth ahead that they would prefer to re-invest contribution profits back into the business and generate even more growth.
Given the dramatic growth of mobile (led by Android), it would not surprise me if Google's next few years resulted in more of an Amazon-style approach. In other words, Google may want to invest a lot of its growth into world domination of the OS that powers the mobile Internet. Who knows where this will lead in the next 10 years.
Just like I had no idea, back in 2004, that Google would go on to dominate video and mobile 10 years later, I don't know what the company will look like in another ten years. Instead, I simply feel confident that Google is still in a dominant position in a rapidly changing business. I want exposure to that. And I'm holding onto my Google shares.