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The
Rest of the Numbers Behind the Google/China Debacle |
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While
we have every intention of continuing to focus on the market's unsung opportunities
- micro cap stocks - today we need to take something of a break
from our normal fare and talk about the 800 pound gorilla in the room....
Google,
and its decision to leave China.
Specifically,
we want to do what none of the mainstream media (nor most investors)
have done before deciding to turn hysterical, which is actually figure
out what Google is giving up before deciding to shed the stock.
The fact is,
too many people may be over-reacting. Once you read through our math and
logic, you may agree that Google is still intact, and may now be a bargain
thanks to the recent bout of selling.
Since most of
you are likely to be all-too-familiar with the background story, we're
not going to rehash what you can get everywhere else. Suffice it to say
that Google Inc. (GOOG) has grown weary of China's insistence on censorship
of the word wide web's content within the country (via google.cn),
and China has grown weary of Google's..... let's call it a 'lack of
enthusiasm', in helping the state censor web search results. Rather
than find a common ground, Google has simply decided it would be easier
just to abandon the market.
 And,
that's
what investors are up in arms about.
Given some of
the stats, the initial frustration is understandable. For instance, access
to the internet in China has only just begun to develop momentum.
As it stands
right now, about 400 million of China's citizens regularly access the web,
or roughly 25% of the country's population. And, with nearly a quarter
of a million new users added every day, the rapid growth of that market
would compel almost any company to tap into the trend.
Moreover, Google
was actually making real headway as one of the country's search engines.
Baidu.com (BIDU) is the undisputed winner of that race, with about 60%
of the market share. Google, however, has recently chipped away
at the competition, earning nearly 40% of the search market in China, up
from owning about 1/3 of the search market a little over a year ago.
For comparison,
Google is the search engine of choice for about 65% of the United States'
225 million internet users, which is about 75% of the U.S. population.
In other words,
the U.S. market's about as big as it's going to able to grow, and Google's
achieved about as much market penetration as it can. In China, not only
is the market growing, but Google had/had a real chance capture market
share.
And the company
left it all behind? What was CEO Eric Schmidt thinking? Keep reading.
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The
Numbers You Probably Don't Know |
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The growth potential
discussed above is attractive to be sure. The question not enough investors
(or the media) are asking, however, is how much of a fiscal impact did
China really make for Google?
 The
answer is, not much.
Though Google
does not offer a country-by-country breakdown of where revenues and profits
come from, more than a couple of in-the-know analysts suggest Google's
revenue from the Chinese market is only about 2% of the company's total
revenue. Other analysts peg Google annual China-based revenue at somewhere
between $200 million and $600 million per year.
Using last year's
total sales of $23.6 billion as a basis, the former guess about China's
actual monetary impact for Google jibes with the latter, reinforcing the
accuracy of the estimates.
Now, compare
that to Google's revenue stemming for the U.S. market..... a much smaller
market. About 45% of last year's $23.6 billion in revenue ($10.6 billion)
was coughed up by U.S.-based search activity, from a pool of about 146
million regular Google users.
See where
this is going? About 146 million American Google users generated $10.6
billion in revenue, while about the same number (literally, the same
140-some-odd-million) of China's Google users generated roughly $450
million in revenue.
That's not to
say giving away or giving up on $400 million is something you'd want to
do every day. But, in light of all the head-butting and headaches the Chinese
market caused Google, it's an understandable decision. Indeed, with the
added expense of a physical presence in China (servers, manpower, legal
representations, fees, licenses, facilities, etc.), it's not even clear
if China was a profitable venture for Google.
But what
about the forsaken growth potential? Fair enough - let's do that math
based on a ridiculous assumption.... that Google could eventually capture
100% of China's search market, and that 100% of China's population.
 Extrapolating
the kinds of dollars Google drew out of China when the search engine had
a 35% market share of 25% of China's population, the absolute maximum annual
revenue could drive from China is about $4.8 billion. Not bad, but it's
not a 'night and day' difference between the $23.6 billion Google is already
doing annually.
Besides, considering
only 75% of the U.S. population is online-capable, and considering
that Google's only the search engine of choice for about 2/3 of them,
that
100% 'best-case scenario' in China shouldn't even be on the radar. A more
realistic figure of about $2 billion per year is what Google's giving up.
Given the headache
China has been through, ultimately it may bear more fruit for Google to
make an exit now, and direct those resources to markets that bear more
fruit. In other words, this may well be a long-term benefit for Google.
Just something
to consider before jumping to a conclusion simply because everyone else
has.
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Micro
Cap Superlatives: The Best of the Best in all the Major Categories |
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it the Academy Awards of the penny stock world.... the Avatars and
the Hurt Lockers of the micro cap universe. Below, you'll find the
'best of' stocks among micro cap names in the categories you care about
as an investor..... cheapest, most growth, most promising, etc.
The
only stipulation is a reasonable one. Any comparison to other companies
or historical results has to be fair and meaningful. In other words, a
$200 million company that earned a nickel last year and is on pace to earn
a dollar this year is indeed probably in track to post the biggest improvement.
But, it's still only a dollar. We're going to limit the applicant pool
to penny stocks you'd actually be interested in for the right reasons.
(And, we've excluded most closed-end funds and ETFs.)
The
Cheapest Stock, Based on Historical P/E Ratio
The
award goes to.... Republic Airways Holdings, Inc. (NASDAQ:RJET).A profitable
airline? You bet - Republic Airways Holdings didn't even flinch in the
midst of the recession, growing sales and income in 2007 and then again
in 2008. Last year was an off year for total net income, as the company
worked through some accounting hits. Yet, Republic Airways Holdings boasts
a twelve-month operating P/E of 4.90. Next year's estimated (and improved
numbers) are just as solid, making RJET undervalued.
The
Cheapest Stock Relative to 2010 Results, Based on Projected P/E Ratio
The
award goes to.... Hallwood Group Inc. (AMEX:HWG), with a forward-looking
(2010) P/E of 5.53. After three consecutive years of sales growth, and
a swing to profit in 2008 that should more than quintuple when 2009's final
numbers are reported, the low valuation is more than plausible for the
coming year. Hallwood Group is also completely uncovered by analysts, creating
a great deal of upside potential as the numbers start to be realized by
the institutions.
Read
the rest at the blog.... |
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What’s
Wrong With This Rally? |
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| Is
anybody else feeling uneasy about the distance and duration of the
current market rally? We're now five weeks into, and up nearly 10% since
the bottom. If you're keeping score, that's the longest continuous rally
since last March 6th's bottom and rebound (which lasted until the peak
on May 8th of 2009), and the third-biggest continuous rally since that
March-2009 bottom. At some point, something's got to give, right?
To
answer our own question, yes, something has to give...and it's
apt to give soon.
Though
our primary interest lies in the market's longer-term trends, we're also
huge fans of maximizing long-term gains by timing entries at short-term
lows, and timing exits at short-term highs. Indeed, careful trade timing
can realistically improve annual 'buy and hold' returns by as much as 50%
(not
raise the percentage rate of return by 50 percentage points, but increase
your current rate of returns to 50% more than its current level... a 10%
return becomes a 15% return, for instance).
And
what do our timing tools tell us now? We've got several we follow, and
we intend to work our way through them over the next few days. The most
pressing one - and the one we want to examine today - is the S&P
500’s Bollinger bands, and how that chart relates to the CBOE Volatility
Index's (or VIX) Bollinger bands.
In
short, the market's run about as far as it can feasibly run. How do we
know? Because of the S&P 500's history with its 50-day Bollinger bands
(with 2 SDs).
Read
the rest at the blog.... |
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
