Just a few days ago, TheStreet.com’s Vishesh Kumar asked if the time was right for Google to split its stock. A conventional two-for-one stock split takes place when a stock price reaches a high psychological price and the company’s board decides to offer two shares for every share that an investor owns in the company. A reverse take over can also take place where stocks high large floats and low share prices take shares off the street by consolidating their shares outstanding.
When Google filed to go public, company founders Larry Page and Sergey Brin decided to forego stock splits and borrow a page from Warren Buffett’s Berkshire Hathaway, whose shares now trade for a breathtaking $106,800 per share.
Research shows that the effect of a stock split is a gain in value of 9% over a year, says David Ikenberry, a professor of finance and chairman of the department of finance at the University of Illinois College of Business. In other words, ceteris paribus, should Google split and historical trends maintain, Google could rise from $500 to $545 just based on the stock split alone.
Google is a ten year old company, its been public for a just over two years. Google is worth $160 billion in market capitalization.
When it comes to trillion dollar companies, Citigroup is one in terms of assets and as measured by sales, Walmart can technically hit $1 trillion in sales in 10-15 years should it continue to grow at historical rates.
But what about market capitalization?
Well, history says that it is very hard to hit $1 trillion in market cap. The world’s most valuable companies currently are ExxonMobil (XOM), General Electric (GE) who weigh in at $425 and $375 billion respectively.
Before the Nasdaq crashed in 2001, Microsoft was the world’s most valuable company. In fact, on one day in March 2000, Cisco was worth more than MSFT, weighing in at $555.4 billion while Microsoft held a value of $541.6 billion. Microsoft was king of software and computing, whereas Cisco was king of networks and the Web’s infrastructure. That did not last, today once again MSFT is the world’s most valuable technology company, but each trails GE and XOM.
XOM’s rising fortunes surged in parallel with rising oil prices, helping it surpass GE as the largest corporation in the world in terms of market capitalization. It should be noted that computing market value is a function of price to earnings ratios (P/E) and price to sales ratios (P/S): what an investor will bid on one dollar of profit and revenue. For mature companies, the ratios are low, for high-growth companies, the ratio is higher.
2006 saw ExxonMobil report record profits, for the full year 2005, it reported US$36 billion in annual income, off $370.6 billion in revenue. Its profit margin is 9.7%. In other words, Exxon clears 9.7 cents on each dollar of revenue it generates. For purposes of illustration, Microsoft earned 30.8 cents for each dollar of revenue, and Google earned 23.9 cents for each dollar of revenue. At the other end of the spectrum, an entity like Starbucks’ profit margin was slightly lower than ExxonMobil’s, at 7.8 cents for each dollar of revenue.
As such, we’re somewhat comparing apples and oranges when we ask this question, but the fact remains, a company like MSFT, Cisco or Google commands a higher market capitalization on lower net income, because it is a high growth company. And, these companies command higher profits on lower revenue, because they are less capital intensive.
Allow us to first state that we do not necessarily think that Google will be worth more in 5, 10 or 25 years that it is today, our table below shows most companies rise in value, then tend to fall.
Of course, the high tech companies listed rose along with the market then fell subsequently. XOM’s recent fortunes can be credited to what the disaster in Iraq did to oil prices. In finance: historical performance does not guarantee future performance, there is always a return to the mean and mainly, all such analysis should be taken with a grain of salt.
But when you consider that:
- by 2010, online advertising in the US will be a $32 billion market and a $110 billion market in Asia alone,
- we are in the information age and Google is the leader of data mining enormous amounts of information,
- search is the most monetizable form of online media and Google is the undisputed king of search, with 50% market share,
- Google has existed for 10 years, been public for 2 and has grown 400% since going public,
We cannot help but ask: will Google stop rising? If so, when? And will it cross the $1 trillion market cap threshold before falling back?
One clarification for people not accustomed to IPO prices etc.: when we list “split adjusted IPO price,” we mean what the IPO stock price was in relation to the stock price today. For example, in the case of Microsoft, the company went public on March 13, 1986 raising US$61 million at US$21 per share. By the end of the trading day, the price had risen to US$28. But, the price today is $27. Clearly, the reason for that is that the stock has split many times…
One MSFT stock on the day of the IPO would be worth over 140 shares today. An original share of Cisco would be worth nearly 300 shares today as it has split nine times.
This is not a full list of the most valuable companies, but rather, a select list of companies:
Even though some of the companies were public before, we only had access to date from 1962, at the very earliest. But even going back just to 1962, you can see that most of these leaders of industry have risen thousands of percentage points to reach their peak. Only two companies are at their peaks now: XOM thanks to oil, Google, thanks to the reasons listed above. One is as old industry as you can get, the other symbolizes the future of the world in the information age.
At the surface, most of the talk surrounding Google boils down to the Web, search, online advertising and text ads. Indeed, yes, Google currently makes 99.9% from one source: text ads. It’s ridiculously simple and it reminds me of that infomercial with the guy who would “place these little ads in classifieds.” Well, I guess Larry and Sergey listened because those “little ads” now explain why Google is worth $150 billion, more than half Microsoft’s value (we wrote earlier on Google potentially taking over MSFT in terms of market cap here).
I’ll give Google the benefit of the doubt, they’re probably not evil, but the amount of data they are mining makes them a far more than valuable shop than we give them credit for. I am using valuable in the figurative sense. In the literal sense, they’re plenty valuable. I am not sure they are worth $153 billion right now. That’s a hell of a lot of money for a company not even making $10 billion a year.
But if we are in the information age (whatever that means) and they have more information on human beings and the fastest growing media ever, that means if they do a lot of things right and avoid a lot of bad things they can be worth more.
How much more? Let’s see…
Google is currently number 30 in terms of market capitalization (incidentally IBM and Cisco are 28 and 29 ahead of it), after ten years of operations, two of which they have been public, it looks like they have quite a way to go.
Of course, Google went public after it had already grown quite a bit as a private company, but more on this later… but if you think of a timeline in terms of 10, 25, 100 years, Google has considerable runway.
Judging by the table above, you can see that most companies - even young ones - tend to rise quite a bit after going public. In Google’s case, it already boasts a market cap of $150B and would need an additional 467% to attain the magic $1 trillion market cap. That does not seem to hard to attain, until you realize that it has already risen 400%.
Since it went public at $100 for a market cap of $30 billion, for it to hit $1 trillion implies a growth of 3,300% since its IPO, compared to the companies listed in the table above, this seems plausible.
Of course, we must reiterate that Google went public at a later stage than others: When Cisco went public in 1990 it had revenues of $69 million. By comparison, when Google went public in 2004, its 2004 revenues were a whopping $3 billion!
So while Cisco has split nine times one one share on IPO day is worth 288 now, the fact remains that it has grown a mind-numbing 100,000% because it went public went it was a relatively small company generating $69 million, 1/50th of Google’s revenue was in 2004 when it went public. In other words, Google’s revenue was 4000% higher than Cisco’s when each company went public.
This begs the question: did Google wait too long to go public? Well, yes. But Google is the only “dot com” that has gone public since the bubble burst in 2000-01. It would have gone public sooner had the markets been more receptive.
In our narrow perspective on IT blogs, we have grown to either canonize Google or outright bash it. The truth is that Google spawned from a combination of variables that created a perfect storm for it to succeed: the biggest ones being “portal envy” amongst search leaders, the second one being the dot com crash. No other company will duplicate what it has done, but to suggest that Google will become a trillion dollar company is a sign of disrespect to the 29 companies that are ahead of Google on the list of most valuable companies as measured by market cap, companies like Procter & Gamble (#13), Vodafone (#23), Sanofi-Aventis (#27), GlaxoSmithKline (#19), Citigroup (#7), PetroChina (#12), GE (#2), not to mention tech peers IBM (#28) and Cisco (#29).
Sure, online advertising and search are hot, but demographics suggest that pharmaceuticals have considerable growth ahead of them. Picking the winner will be the challenge there. Globalization suggests that Chinese firms will become much more valuable, again, picking the winners will prove to be the challenge.
In technology, Google has done a lot and will do much more… when Infospace was worth $20 billion in 2000, CEO Naveen Jain said it would be the first trillion dollar company, and some members of the media gladly bought his vision. Today Infospace boasts an enterprise value of $200 million.
But much the same way that Google came out of nowhere and within ten years grew to be the 30th most valuable company in the world, the search to create the world’s first trillion dollar company as measured by market cap might be something that Google lacks the result for.
In the next week we’ll publish Part II which will examine the profile of the world’s probable first trillion dollar company.
Disclosure: Of the companies mentioned, I own YHOO and INSP.
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