Google: Parsing the $100 Billion Remark

Reader Kevin Harper asked a good question, namely "What was Eric Schmidt really saying with that $100 Billion remark?"  Here's my take:

In a few clever words, Schmidt conveyed the following:

• As anyone who has checked the stock price recently knows, we are now a $100-billion-plus market cap company.  We got here in a hurry, and one reason we are spending a fortune in CAPEX is that we are building out the infrastructure necessary to support a global organization of this size.
• We believe that our long-term global opportunity is so immense that we could one day generate $100 Billion in revenue.  Not this year, not next year, but some year, and we are putting the infrastructure in place to support a company of that size.
• Oh ye of small minds who are splitting hairs about our quarterly growth rates, you are missing the forest for the trees.
• Two days ago, George Reyes reminded you about the downside.  I hereby remind you of the upside.
• Did you think I was talking about revenues?  Please.  That would be ridiculous.  There are only a couple of companies in the world with that much revenue.
• This whole parsing of every single word uttered by management is a little ridiculous, don't you think?  We do.

In any case, I don't think he was suggesting that the stock is currently overvalued.  He doesn't know whether it's overvalued or not, and neither does anyone else.  The stock is certainly risky, but to prove overvalued/undervalued, we'd have to know the next hundred years of cash flows, which we don't (which isn't to say that CEOs don't occasionally believe they know what their stocks are worth).

Comments

[Kevin Harper]

Thanks Henry, I agree that this is probably what Eric meant. The first report out on that quote confused the issue for me, because it suggested that Eric was intending to achieve $100 billion in revenue this year, which is absurd.

[/pd]

Revenue at $100B - that is certainly ridiculous !! right now there are hovering at the high end at approx $73.5B (correct me if I am wrong Henry)- Thats the CAPEX. Now , all they need to do is reach that golden Price Range of approx $600-750 and then they will close to that Bracket. Give or take their past trend, all they need to do is woe the investor adn create a bullish market !!

Point #2; There current cashflow is in alittle excess of $1.2B. this means that they will need a revenue growth of approx 33% YTY to make the bar go from $6.1B to approx $8.1B - So this means, a net revenue growth of approx $2.0B

Wait a sec, ask yourself the questin - in which vertial have we ever seen that $1/- Spent/invested returns $2/- ??

Well-- after all they only have $1.2B to spend and need to make $8.1B revenue to ensure that $100B CAP !!

Ant that a ridiculous thought eh ?? or where is my tought process flawed ??

[Kevin Harper]

I accept the $100 billion-in-revenue-someday interpretation of what Eric meant without necessarily accepting the premise that they will ever get there. Maybe they will, that's unknowable at this point.

I've been focusing more on technicals, and frankly, that's all that matters when the masses start selling. But there are reasons that I've started to swing bullish again, and I've posted them here for anyone interested.

http://8harpers.com/options/2006/03/ok-bulls-win.html

There are times when fundamentals just plain don't matter. Nothing fundamental happened between 475 and 337, but a lot of things happened technically.

[Bradley Twohig]

In the long-term I see them being analygous to a Newscorp size company for the digital era. They deliver the content the masses want, are diversifying into logical media, but in the end will run up against stiff competition that will keep them from dominating the entire internet. Big established old world corporations aren't standing still, they are just beginning to move.

[anon]

It seemed lots of people were confused by the CEO's $100B remark, and tried to interpret it in different ways, or just expressed their anger outright, as shown in Silicon Valley's main newspaper:

http://www.siliconvalley.com/mld/siliconvalley/14009054.htm

However, I disagree with all who I've read, including Henry's speculation about a potential strong Q1, even though it could very well turn out to be true.

My point is that Eric's remark is probably one of the most brilliantly coy statement a CEO could have made, since it accomplished several objectives at once:

- Brought back investors' confidence in the company/stock.

- Provided a glimpse of future hope (huge) for investors.

- Since the company has already surpassed the 100B market cap, most investors would probably assume they're talking about future revenue. That could have created a huge reversal in investors' sentiment, therefore not only supported the slide after the CFO's remark, but also reversed a major portion of it, as evident in the last few days.

The brilliant part is that, in leaving his statement open for interpretation, the company can easily avoid any potential legal liability, even if Q1 would turn out to be weak again, and cause another crush:

1) For now, based on the rosy outlook, the stock would at least stabilize/hold its ground, or even start to move up again, since investors might be lured back. Good thing.

2) If Q1 would turn out to be strong, then great, the stock would probably explode to the upside. Best of both world.

3) If Q1 would, unfortunately, turn out badly, and the stock get crushed once again, no problem. He already warned investors publicly in advance: he were talking about market cap, and that meant he'd expected the stock to come down, but investors didn't do their due diligence and interpreted it the wrong way! Not the company's problem!

Not only that, since the stock could very well go up from now until the next report based on much improved sentiment/speculation, even if it'd get crushed like the last time, that would probably happen at a higher price rather than lower.

So, did he talk about 100B market cap, or 100B revenue? It doesn't matter. Q1's result strong or weak? Doesn't matter. It's a win-and-no-lose situation.

What could be more brilliant? Seemed like many people underestimated Eric's talent!

[Srinivasan]

100 billion in Revenue? I think this is getting funny.
And we need to accommodate for the fact that Key Googlers will leave, of course with key ideas, to start their own stuff. And we need to accommodate for click fraud and the "changing advertising landscape" - have a look at our post on "focussed curiosity advertising" -
http://web20milliondollarhomepage.com/blog/?p=7

[brian]

Nope, he didn't mean $100 billion in revenues. To appease the Google faithful he had to say Google could someday earn $100 billion in net income...per quarter!

[Dimitar Vesselinov]

Almost 400k machines at Google?

"According to Paul Strassmann's lecture, a standard Google Cluster contains 359 racks with 31654 machines.

He also mentions that there are ">12" data centers around the globe. Assuming each data center has at least one Google Cluster that means that Google is operating > 379848 individual machines.

Video of the lecture is also available at strassmann.com"

http://www.roughtype.com/archives/2006/03/a_question_for.php#comments

[bronxite]

While the management haven't made any public statements about GOOG's valuation, it should be noted that they called upon Jay Ritter to consult for their IPO. Ritter has also opined on a "rational management's" decision to float a secondary offering. It's action that should be taken when management consider their stock to be overvalued. A rational management should sell new shares, and put the proceeds to work in short term commercial paper. This is exactly what Google did. Of course, a few months later they were then investing in bio-info-nano with NASA.

[B]

Talk of $100 billion is good for beer bash follies in their new 757. Preferably with hot chicks hanging all over them. Talk of $100 billion in a meeting with analysts is pure horse sh*t. It wreaks of a type of foolishness that should not be exhibited by a seasoned senior management team. Of course, none of them are seasoned. But, to be fair the two geeks, I say that affectionately, have a chance of becoming that. The CEO and CFO likely don't. This is no different than my criticism of the "fund" manager who made some assinine comments about Google's earnings five years from now.

Look, I've been around the block a few times. And a few of those times I was dragged. I've seen it all and heard it all. "Putting an infrastructure in place to support a $100 billion company" You know, they aren't the first company to make that EXACT statement. Takers on who said that first? Anyone? Anyone? No, it wasn't Ben Stein. It was John Akers at IBM. They were even better than Google. They had over 75% of the corporate computer market at that time. That, of course, was soon followed by a complete hosing by the markets, their competitors and their own internal morass. It's great to have a vision but I think getting to 1/20th of that vision would make alot of people happy.

Here is a relatively known certainty. The economy will likely slow. The global trade environment will become more precarious caused by globalized worker wage pressures in legacy economies. Interest rates are likely headed higher. And, the easy money has been made in this earnings cycle. So, if all of this comes to pass, how low will Google go? That is the more prescient call. Not when it will make a new high.

[Still Inside]

If Schmidt really sees a $100B future, then:

1) Why is Schmidt and others dumping the stock as fast as they can?

2) Why didn't they give us even the foggiest idea of what sort of markets and penetrations therein would support such a number? Walmart could have justified that number when they were a drug store in Arkansas by simply saying, "you know... retail is really huge". Why didn't Schmidt give us his back-of-the-napkin numbers for the $100B future of GOOG?

Shmidt didn't give us a material fact or even an opinion, but rather an innuendo. He said, "we're building the company as if we're going to make $100B". So does that mean we'll see capex spending in the coming quarters in billions? If so, start shorting the stock now.

But of course he didn't mean it that way, and clearly nobody even at GOOG takes that comment literally. His comment was meant to restore enthusiasm over GOOG stock. The fact that he choose to do it this way is very, very scary.

SI