August 17 2004 was an auspicious day. It was the day many analysts said the “second Dot Com crash” had been kicked off. It was the day that investment bankers were green with envy - it was the day Google was supposed to have made a huge mistake, that in the future would cost its naive founders dear.
On August 17 2004 Google was floated. With a market valuation, after day one, of around $24.4 billion, the company was in the midst of a $52 million profit quarter - and to many it seemed an example of markets gone mad. It seemed to be an example of a company that had been hyped to absurd valuation - making a crash in shares inevitable.
The flotation also marked a deviation from the way things were usually done. Instead of agreeing cosy little deals with investment banks, fixing a price for them to acquire shares in advance of the IPO, leaving the little guy with the scraps - as is the way it is usually done, Google treated everyone the same. Both the giant corporate and individual investor had to join a dutch auction. Share price at the IPO was determined by supply and demand, rather than by men with big cigars. And Wall street didn’t like it. The company would rue the day, the money men said.
And yet…29 months on, the only people with egg on their faces are the critics and cynics of the Google float. Yesterday, the company revealed its latest set of results. In the final quarter of 2006 it made a profit of $1.03 billion, compared to a mere $372 million a year ago. Or, a staggering 20 fold increase on the profit posted in the final quarter of 2004. So that’s a 2000 percent jump in profits in two years- not bad.
All of a sudden the valuation on float seemed pessimistic in the extreme. In fact the company’s 2006 profit was in excess of $3 billion. This means we can look back with hindsight to the day of flotation and calculate that the forward pe ratio for Google, for the full year period starting 15 months after the IPO, was just eight.
As for the future. The company made a number of very interesting comments.
Firstly it said it had been concentrating on quality of ads rather than number. You may have noticed, these days less ads appear next to your results when you type in a key word into Google. Apparently, they are more carefully targeted now. But, says the company, this change in strategy has resulted in higher revenue
As CEO Eric Schmidt said: “The targeting and the technical work that we are doing is producing better return for advertisers, better revenue for us, with even fewer advertisements.”
Secondly, and perhaps even more importantly, the company says advertisers are increasingly using Google as a medium for brand advertising, meaning the number of hits is not so important - it’s views that count. Brand advertising is a whole new ball game, and represents a massive opportunity for growth in advertising revenues. Business Week quoted John Aiken, managing director at Majestic Research as saying: “They’re benefiting from people searching online and purchasing offline.”
Then there’s TV. The company has of course already bought YouTube, and that provides a giant as yet uncapped opportunity for brand advertising.
But, the company has plans to use its technology to sell advertising on TV broadcasted to Set Top Boxes. With each Set Top Box carrying a unique IP address, Google believes it can introduce technology for pushing different and targeted ads to each viewer of a TV programme.
One of Google’s strengths seems to be its ability to push forward opportunities for advertising in areas previously outside of the advertising domain altogether.
Take online retail as an example. For the traditional bricks and mortar advertiser, the single biggest factor that determines success is position on the high street. For the online retailer, it’s position on Google that counts, meaning that all of a sudden, for the virtual retailer, the money that would have been spent by a traditional retailer on rent, is now being spent on advertising.
And, if Google can really enable the targeting of TV ads to each individual viewer via set top boxes, then once again, a new market untapped to date, providing incremental income opportunities, emerges.
Google is not just getting itself a bigger share of the advertising cake, it’s growing the size of that cake too.
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