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Faceplant with Facebook?

With the Facebook IPO coming up this Friday there is a lot of attention around its business model and financials. I’m not an expert in this area, but my hunch is that a lot of people will lose a lot of money by chasing after Facebook shares. Why?

I think there are two types of answers. One from reasoning and one from intuition.

For reasoning one needs to look at a more technical assessment of the business model and financials. Some have written extensively about the comparative lack of innovation in Facebook’s business model and core product. Some have compared Facebook’s performance in advertising to Google – the estimates are that Google’s ad performance is 100x better than that of Facebook. Some have pointed out that many of Facebook’s core metrics such as visits/person, pages/visit or Click-Through-Rates have been declining for two years and go as far as calling this the Facebook ad scam. One can question the wisdom of the Instagram acquisition, buying a company with 12 employees and zero revenues for $1B. One can question the notion that the 28 year old founder will have 57% of the voting rights of the public company. One could look at stories about companies discontinuing their ad Facebook efforts such as the Forbes article about GM pulling a $10m account because they found it ineffective. The list goes on.

Here is a more positive leaning infographic from an article looking at “Facebook: Business Model, Hardware Patents and IPO“:

Analysis Infographic of pre-IPO Facebook (source: Gina Smith, anewdomain.net)

To value a startup at 100x last year’s income seems just extremely high – but then Amazon’s valuation is in similarly lofty territory. As for reasoning and predicting the financial success of Facebook’s IPO, people can cite numbers to justify their beliefs both ways. At the end of the day, it’s unpredictable and nobody can know for sure.

The other answer to why I am not buying into the hype is more intuitive and comes from my personal experience. Here is a little thought experiment as to how valuable a company is for your personal life: Imagine for a moment if the company with all its products and services would disappear overnight. How much of an impact would it have for you as an individual? If I think about companies like Apple, Google, Microsoft, or Amazon the impact for me would be huge. I use their products and services every day. Think about it:

No Apple = no iPhone, no iPad, no iTunes music on the iPod or via AppleTV on our home stereo. That would be a dramatic setback.

No Google = no Google search, no GMail, no YouTube, no Google maps, no Google Earth. Again, very significant impact for me personally. Not to mention the exciting research at Google in very different areas such as self-driving vehicles.

No Facebook = no problem (at least for me). I deactivated my own Facebook account months ago simply because it cost me a lot of time and I got very little value out of it. In fact, I got annoyed with compulsively looking at updates from mere acquaintances about mundane details of their lives. Why would I care? I finally got around to actually deleting my account, although Facebook makes that somewhat cumbersome (which probably inflates the account numbers somewhat).

I’m not saying Facebook isn’t valuable to some people. Having nearly 1B user accounts is very impressive. Hosting by far the largest photo collection on the planet is extraordinary. Facebook exploded because it satisfied our basic need of sharing, just like Google did with search, Amazon did with shopping or eBay did with selling. But the entry barrier to sharing is small (see LinkedIn, Twitter or Pinterest) and Facebook doesn’t seem to be particularly well positioned for mobile.

I strongly suspect that Facebook’s valuation is both initially inflated – the $50 per account estimate of early social networks doesn’t scale up with the demographics of the massive user base – as well as lately hyped up by greedy investors who sense an opportunity to make a quick buck. My hunch is that FB will trade below its IPO price within the first year, possibly well below. But then again, I have been surprised before…

I’m not buying the hype. What am I missing? Let me know what you think!

UPDATE 8/16/2012: Well, here we are after one quarter, and Facebook’s stock valuation hasn’t done so well. Look at the first 3 month chart of FB:

First 3 month of Facebook stock price (Screenshot of StockTouch on iPad)

What started as a $100b market valuation is now at $43b. One has to hand it to Mark Zuckerberg, he really extracted maximum value out of those shares. It turns out sitting on the sidelines was the right move for investors in this case.

 
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Posted by on May 16, 2012 in Financial, Socioeconomic

 

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Quarterly Comparison: Apple, Microsoft, Google, Amazon

Quarterly Comparison: Apple, Microsoft, Google, Amazon

Last quarter we looked at the financials and underlying product & service portfolios of four of the biggest technology companies in the post “Side by Side: Apple, Microsoft, Google, Amazon“. With the recent reporting of results for Q1 2012 it is a good time to revisit this subject.

Comparison of Financials Q4 2011 and Q1 2012 for Apple, Microsoft, Google, and Amazon.

Market cap has grown roughly by 25% for both Apple and Amazon, whereas Microsoft and Google only added 5% or less. A sequential quarter comparison can be misleading due to seasonal changes, which impact different industries and business models in a different way. For example, Google’s ad revenue is somewhat less impacted by seasonal shopping than the other companies.

Sequential quarter comparison of financials

Apple and Microsoft seem to be impacted in a similar way by seasonal changes. For Amazon, which already has by far the lowest margin of all four companies, operating income decreased by 40% while it increased its headcount by 17%. This leads to much lower income per employee and with increased stock price to a doubling of its already very high P/E ratio. I’m not a stock market analyst, but Amazon’s P/E ratio of now near 200 seems extraordinarily high. By comparison, the other companies look downright cheap: Apple 8.8, Microsoft 10.5, Google 14.5

Horace Dediu from asymco.com has also revisited this topic in his post “Which is best: hardware, software, or services?“. What’s striking is that all three companies (except Amazon) now have operating margins between 30-40% – very high for such large businesses – with Apple taking the top near 40%. Over the last 5 years, Apple has doubled it’s margin (20% to 40%), whereas Microsoft (35-40%) and Google (30-35%) remained near their levels.

(Source: Asymco.com)

Long term the most important aspect of a business is not how big it has become, but how profitable it is. In that regard Amazon is the odd one out. Their operating income last quarter was about 1% of revenue. Amazon needs to move $100 worth of goods to earn $1. They employ 65,000 people and had revenue of $13.2b last quarter, yet only earned $130m during that time! Apple earns more money just with their iPad covers! Amazon’s strategy is to subsidize the initial Kindle Fire sale and hoping to make money on the additional purchases over the lifetime of the product. In light of these numbers, do you think Amazon has a future with it’s Kindle Fire tablet against the iPad?

But what really struck me about the extreme differences in profitability is this comparison of Apple and Microsoft product lines (source: @asymco twitter):

(source: @asymco twitter)

This shows what an impressive and sustained success the iPhone has been. And the iPad is on track to grow even faster. Horace Dediu guesses that Apple’s iPad will be a bigger profit generator than Windows in one quarter, and a bigger profit generator than Google (yes, all of Google) in three quarters. We will check on those predictions when the time comes…

 
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Posted by on May 2, 2012 in Financial, Industrial

 

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Side by Side: Apple, Microsoft, Google, Amazon

Side by Side: Apple, Microsoft, Google, Amazon

Ed Bott at ZDNet.com wrote a post with the title: Microsoft, Apple, and Google: where does the money come from? He looked at the quarterly reports of these companies (links to sources in the article) and displayed a pie-chart of the revenue mix for each of them. Inspired by that, I added a fourth company – Amazon (source: 10-K for 2011) – and aggregated those pie-charts into one graphic.

Revenue Mix for Apple, Microsoft, Google, and Amazon

All four are large consumer-oriented technology companies; like millions of customers, I use many of their products and services every day. They each operate with different businesses models:

  • Microsoft: Software
  • Apple: Hardware
  • Google: Advertising
  • Amazon: Retail

Yet as a consumer I rarely think about these differences. All of them use state-of-the-art technologies like cloud-computing and mobile devices to achieve integrated end-to-end experiences geared to increase revenues in personal computing (Microsoft), smart mobile devices (Apple), online search (Google) or shopping (Amazon). And arguably all of them derive major competitive advantage from their software, such as Apple’s iOS which introduced the touch interface.

Perhaps most surprising is Google’s almost singular reliance on advertising, which makes it a very different business model. They offer all their technology for free – from search to mapping to operating systems and social media – to grow and retain online attention as enabling condition for advertising revenue. For a business this big the near complete dependence on one source of revenue is unusual; perhaps its time for Google’s leadership to seriously consider a diversification strategy? Without it Google is arguably more prone to disruption (such as from Facebook) than the other companies. Speaking of disruption: Apple derives almost 3/4 of its revenue (73%) from iPhone and iPad, neither of which existed 5 years ago. As Ed Bott points out, those two products now drive an astonishing $33.5b revenue per quarter!

To compare the companies by their absolute numbers, here is a bar chart of market capitalization, revenue and profit: (all in billions of Dollars and for Q4 2011, market cap as of 2/3/12)

Market Cap, Revenue and Profit for Apple, Microsoft, Google, and Amazon

Market cap of these four companies combined is approaching $ 1 trillion. Much has been written about the differences in market valuations relative to revenue and most importantly profit. The markets undervalue Apple and overvalue Google and Amazon. Let’s compare these dimensions (and number of employees) in the following radar plot:

Relative business performance for Apple, Microsoft, Google, and Amazon

The plot shows the relative performance of all with the highest in each dimension normalized to 100%. Amazon shows by far the smallest profit in the last quarter. Given it’s retail nature, it’s profit margins have always been smaller; and CEO Jeff Bezos has long emphasized the strategy of investing in future growth at the expense of present profits. Microsoft continues to enjoy very solid profit margins in a large, well diversified business. Google has incredible talent and for now is the undisputed king of online advertising. But Apple leads in all three factors, and it achieves 2x Microsoft’s results with less than half the number of employees! Apple’s profit is 1.5 times that of the other three combined! And it makes more than 60% of the profit with less than 20% of the employees. In fact, Apple’s market capitalization is now higher than $10m per employee! It must feel pretty special to be one of them these days…

Postscript: On Feb-13 analyst Horace Dediu at Asymco.com published an article with time-series data for the above companies (except Amazon) over the last 18 quarters (since 2007). It shows the evolution over time as depicted in this chart:

Apple Microsoft Google - Revenue and Operating Income 2007-2011

The article is called “The World’s Biggest Startup“. It’s main point is this: Microsoft and Google both grew their businesses steadily, but did not change their type of business. Apple did some of that in its established business segments, but more importantly and disruptively it added new categories (iPhone and iPad) for dramatic growth. That’s what startups do. Just so happens that Apple – whose stock today for the first time hit $500 – is also the most highly capitalized company in the world (around $460B). If Apple is a startup now, what will they look like when they are fully established?

 
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Posted by on February 6, 2012 in Financial, Industrial

 

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Google Fusion Tables – Free Visualization Tool

Google does search very well. But Google does so much more than that. Think GMail and Blogger, YouTube and Picasa, Google Maps and Google Earth, to name just a few. The Google products page at present lists about 50 tools across categoires Web, Mobile, Media, Geo, Home & Office, Social, Specialized Search, and Innovation. In this last category is Google Fusion Tables, a free tool to share, analyze and visualize data on the web.

You can upload, display and edit your own data, do some filter, aggregate, merge operations, and leverage a series of typical visualization options (Table, Map, Line, Bar, Pie, Scatter…), similar to what you expect from a spreadsheet tool like Excel or Numbers. Through integration with Google Maps APIs it is easy to generate geographical maps and charts such as this demonstration of average cigarette use in countries across the world.

Sample Demonstration of Google Fusion Tables tool showing a world intensity map of cigarette use.

This makes the tool a good candidate to learn or teach about data visualization and play with the available sample data. The bucket of available public tables is rather unstructured – no taxonomy or hierarchical structure – and search for tables is surprisingly limited.
That said, there are plenty of documents, FAQ, APIs, and Forum discussions. And some of the demonstrations are quite useful, for example the website newspapermap.com which shows an interactive world-map with more than 10.000 newspapers in their respective geographies and color-coded in the published language:

Note the color-code for different languages.

 
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Posted by on June 8, 2011 in Industrial, Socioeconomic

 

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