Goog

[trader220]

I don’t think you'll see quite the collapse in GOOG that you saw in the dot bomb era. I don’t trade GOOG but I did trade The Street DOT COM index back in the hay day as a market maker in options on that index... and yes we laughed our asses off as they ( John Q Public ) just came in and sold puts to us and bought calls from us as the thing rallied. It was lovely for us the calls were so jacked that John Q Public rarely bought ones that ended up anywhere near being in the money because that’s all he could afford and he often sold us puts which we loved to buy since all we would do is buy the index basket of shares vs. selling the calls and puts and we made a bloody fortune till the music stopped. Some of the more shrewd public I think did quite well.

As is always the case in stocks like these, it’s not for the meek and the average Joe is probably going to be left holding the bag when the music stops.

If you look at the GOOG options much you’ll notice the volatility has gotten buried and I bet some people think there is a heck of a lot of air to come out soon.... but that’s just my opinion from looking at the volatility charts..

http://www.ivolatility.com/options.j?ticker=GOOG:NASDAQ&R=1&period=12&chart=2&vct=

[trader220]

Oh and by the way IMHO ( and I am not in sales or have ever dealt with the public directly ) I agree with turbo6bar. How can you ignore BRK a&b... My father is 65 and he’s old school getting ready to totally retire and he’s had a couple of Brk A’s for a while and he’s a happy guy.

[Shuie]

BRK.A might be as close to a guarantee as you can get. BRK.B isn't bad at all either. I totally agree. Don't get me wrong, Im not knocking either of those at all. There are no free rides. They cost what they cost because they make people $$$

[alf]

The PE on GOOG is way over the top. They will have to keep up their pace of growth to sustain the valuation.

Goog $155 billion market cap with 65 PE
Msft $294 billion market cap with 23 PE

The fundementals are just not there to support that level of PE in the long run for Goog at this time.

[KFC911]

Originally posted by turbo6bar
BRKA and BRKB should not be ignored. Compare the 10 yr performance of either against the indexes.

GOOG is way to overpriced for me right now (I purchased at the IPO, rode it up (then back down) to 415 before selling. I'm looking for dividend/yield (and other) information for both BRKs and can't find a good source. Can someone point me in the right direction?

[turbo6bar]

Berkshire Hathaway does not pay a dividend. The cash is reinvested. It must be weighed against the significant growth in share price.

[alf]

and today Goog dropped $20 to $480, it should realistically be about $250 or so. Sort of like going to the casino with this stock.

BRK is about investing in fundementals not hype; slow and steady.

[trader220]

Where do you get 250 from?

[competentone]

Originally posted by alf
and today Goog dropped $20 to $480, it should realistically be about $250 or so.

I'm wondering if GOOG should be more like $2.50.

There is something very wrong with their balance sheet -- specifically their accounts receivables number. It currently stands at approximately a billion dollars.

At first glance, looking at their overall revenue numbers you wouldn't think it represents any problem, but if you start doing calculations, considering their billing system and what they've told us about their customer base, the number just doesn't make sense. I'm beginning to wonder if there is some sort of "sloppy" accounting (maybe fraud?) going on and receivables is being used as a "dump" to keep certain losses from being realized and affecting earnings negatively?

In brief:

Google has a system where most (from their SEC filings it would be about 90%) of their revenue is from small advertisers. These advertisers have to pay Google with a credit card. At no time, more than $500 is owed to Google from any individual small advertiser -- for starting advertisers, that number is less than $500, but for the established ones, their credit cards are charged when the advertising used reaches $500.

Last year's class action suit against Google gave us the information that Google has had a total of about 400,000 advertisers. Even if we assumed that all of these 400,000 advertisers are still advertising with Google and all of them were running a maximum outstanding balance with Google of $500, we still just get a number of $250 million in receivables.

Even if we add the probable amounts outstanding from the "big" (approximately 10% as described in Google's SEC filings) advertisers, I still can't see a receivables number that should be any larger than about $450 million (and that is being extremely biased in favor of a larger number).

As I see it, there is at least $500-$600 million in the receivables number that just can't be "justified" knowing what I understand about Google's billing system and customer base.

Additionally, when we have competitors like Yahoo talking about how soft the advertising market is, yet Google keeps reporting record earnings, I start having WorldCom flashbacks!

And of course there is the $8+ billion of insider sales of stock!

Maybe we won't see $2.50, but some sort of massive write-down on receivables and a huge crash in the stock price wouldn't surprise me.

[KFC911]

Originally posted by alf
....BRK is about investing in fundementals not hype; slow and steady.

That's really what my portfolio is all about. Although I have hit several grand slams (amongst some strikeouts), primarily in the computer/networking/software sectors over the years, I've been focusing on slow & steady (dividends, etc.) as of late. Warren Buffet's track record speaks for itself...

[alf]

Originally posted by trader220
Where do you get 250 from?

Just a simple industry PE valuation SWAG

If i were Google, i will do what AOL did back in the day and start buying up companies that have real long term value and start shoring up.

[dtw]

Originally posted by competentone
Google has a system where most (from their SEC filings it would be about 90%) of their revenue is from small advertisers. These advertisers have to pay Google with a credit card. At no time, more than $500 is owed to Google from any individual small advertiser -- for starting advertisers, that number is less than $500, but for the established ones, their credit cards are charged when the advertising used reaches $500.

Last year's class action suit against Google gave us the information that Google has had a total of about 400,000 advertisers. Even if we assumed that all of these 400,000 advertisers are still advertising with Google and all of them were running a maximum outstanding balance with Google of $500, we still just get a number of $250 million in receivables.

Even if we add the probable amounts outstanding from the "big" (approximately 10% as described in Google's SEC filings) advertisers, I still can't see a receivables number that should be any larger than about $450 million (and that is being extremely biased in favor of a larger number).

(400k advertisers times $500 ea = $200M.)

How are you determining that large customers don't make up more than 10% of their receivables book? In '05, AOL alone accounted for 9% of revenue. I think you may be mis-reading the SOP 94-6 disclosure on concentration of credit risk - in Note 1 of the '05 10K financial statement notes, they are stating that no other single advertiser makes up more than 10% of revenue. If Google has 10 large advertisers, other than AOL, that represent, on average, 5% of revenue each, you've just explained 50% of their A/R portfolio (assuming consistent collections among each). Their DSO looks great - 41 days at 12.31.05 and 34 days at 6.30.06 - and their bad debt expense also looks good when compared to their allowances. Further, gross accounts receivable is usually pretty straightforward to audit - auditors confirm balances with debtors and also vouch subsequent payment of invoices outstanding at the BS date - not a lot of sleep is lost over ensuring receivables exist.

I do encourage your skepticism as a reader. What about revenue? That's where the red flags usually pop up in a tech/web company like this. I'd be more concerned about a major customer publicly calling billings into question, or GOOG managment coming forward with a quality of earnings problem, than a receivables issue.

[Sonic dB]

$80 last month for Adwords with no results.. what a ****** scam!

Click fraud. That whole pyramid scheme is going to come crashing down someday, if the system is not changed first...count on it.

[competentone]

Originally posted by dtw
(400k advertisers times $500 ea = $200M.)

Thanks for the correction on the math -- my brain was tired when I was writing (as it is tonight again, so correct me again if I make any more blunders).

Originally posted by dtw
How are you determining that large customers don't make up more than 10% of their receivables book? In '05, AOL alone accounted for 9% of revenue.

You are not understanding Google's advertising system -- AOL is an AdSense partner -- the advertising Google puts on AOL brought Google 9% of their revenue. AOL did not buy enough advertising from Google to account for 9% of Google's revenue. (I'm not sure how much advertising AOL/TimeWarner actually buys from Google, but do not recall reading any analysis indicating that they are a major purchaser. I think Ebay is still the number one purchaser of Google ads -- that's why you almost always get some Ebay ad displaying when you do a Google search.)

The 9% of revenue for Google that comes though AOL's sites has no relationship with Google's receivables since the arrangement between Google and AOL would actually represent a payables on Google's balance sheet.

A brief explanation of Google's advertising system and its AdSense partnerships might make this clearer:

Google get 99% of its revenue from advertising; their advertisers participate in what is called Google's AdWords program -- advertisers bid on certain words/terms so that their ad is displayed when someone uses Google and searches for those words/terms. The ads are also displayed on sites that Google partners with; these partnership sites are part of Google's AdSense network. Google records revenue when someone clicks on an advertiser's ad and bills the advertiser consistent with the terms I described earlier.

Some of Google's partners are large -- like AOL, some are small -- like Pelican. Note the Google ads at the bottom of this page; Pelican gets some of the money the advertiser has to pay to Google when a user clicks on one of those ads. The exact same thing happens with AOL -- except I'm sure the payments AOL gets are a lot larger than the ones Wayne gets since the AOL displayed ads are responsible for 9% of Google's revenue!

If anyone searches from AOL, they are effectively doing a Google search. The advertisers that display on AOL's search results pages are not advertisers AOL is collecting revenue from directly, they are advertisers with Google who are having their ads display on AOL's pages. Google collects the revenue from the advertisers when someone clicks on the ad, then pays a percentage to AOL, or whatever partner site the ad was displayed on.

The time between Google collecting the revenue from the advertiser and actually paying the percentage owed to the AdSense partner will result in an accounts payable on their balance sheet. At no time does the AdSense network result in a receivables on Google's balance sheet.

(Google's relationship with AOL -- and some of their other large partner sites -- actually involve Google guaranteeing certain payments to the partners, which Google will be obligated to pay even if they do not generate enough revenue from their advertisers to cover those payments. If the advertising market/economy goes into a slump, these arrangements could really hurt Google's earnings.)

Originally posted by dtw
Further, gross accounts receivable is usually pretty straightforward to audit - auditors confirm balances with debtors and also vouch subsequent payment of invoices outstanding at the BS date - not a lot of sleep is lost over ensuring receivables exist.

I'll have to plead ignorance on the specific methods the outside auditors use to confirm that receivable numbers are accurate. I do know that following HealthSouth's fraud, the multi-billion dollar write-downs involved hundreds of millions in receivables. What ever methods HealthSouth's auditors were using were not effective in finding the fraud hidden there. I'm not as familiar with the specifics in cases like Enron or WorldCom, but the auditors missed the fraud in these companies too -- the problem is that the auditors can only "spot check" something like receivables, and the company oversees how that "spot checking" is done. The auditors only end up seeing what the company wants them to see.

[dtw]

Originally posted by competentone
I'll have to plead ignorance on the specific methods the outside auditors use to confirm that receivable numbers are accurate. I do know that following HealthSouth's fraud, the multi-billion dollar write-downs involved hundreds of millions in receivables. What ever methods HealthSouth's auditors were using were not effective in finding the fraud hidden there. I'm not as familiar with the specifics in cases like Enron or WorldCom, but the auditors missed the fraud in these companies too -- the problem is that the auditors can only "spot check" something like receivables, and the company oversees how that "spot checking" is done. The auditors only end up seeing what the company wants them to see.

Thanks for the explanation of Google's system. That does clarify things. Nonetheless - my points about their receivables composition stands. Receivables should be a slam dunk - but revenue is another story. Bet that a lot of time is spent by the auditors reviewing all aspects of the revenue process - both the software controlling everything and the accounting support for their model.

I can shed some light on audit procedures - without getting too far off topic - receivables at a hospital system (HealthSouth) are MUCH different than just about any other type of business. The doubtful accounts reserves require significant amounts of management judgment, and are extremely difficult to pinpoint. Could go on at length about that - but wrong topic.

A company absolutely does not oversee how auditors perform their testing. Another long topic, will restrain myself here too.

I'm not saying there are no time bombs in Google's books - whether fraud or accounting mistake - I haven't audited them and I only spent a few minutes skimming their latest K and Q. I just wanted to clarify the concentration of credit risk disclosure - and perhaps draw attention to the most sensitive area in a company like Google - revenue. Check out Nortel, BDSI, AOL, Informix, Tekelec, etc. All revenue explosions, but not necessarily fraud.