Google Ipo Analysis.

1. Review the principal surges and overall movement in Google’s shares from the IPO to the present. How did Google perform relative to the prospects presented by the 3 pricing models (see WSJ news articles)? What factors drove the share price higher? What expectations in the models were realized? Which were not, if any?

Comparation to comparable companies: Sometimes financial statements can cheat investors. It is because different accounting method is used when calculating the revenues and costs. Yahoo counts as revenue the "gross" amount it is paid. It counts its payment to the publisher as an expense, labeled as a "traffic acquisition cost." Google, by contrast, counts as revenue only the "net" amount remaining, after it pays the Web publisher. The accounting choices result in very different images for investors. For investors who value companies based on revenue, or revenue growth, Yahoo's formal presentation makes its revenue appear to be larger and growing faster. Yahoo's reported gross revenue grew 168% in the first quarter, however, net revenue grew a robust but less- impressive, 94%. Likewise, Google's choice of net revenue slows its growth rate, because revenue from the ads Google places on other sites is increasing faster than total revenue. In the first quarter, Google's revenue grew 122%. On a gross basis, however, revenue grew 162%. When it comes to profit margins, the accounting choices create the opposite impression: Yahoo's accounting makes its profit margins appear smaller, and Google's makes its profit appear larger. Investors were convinced that the lower revenue of Google will devaluate the share price of google. Since the profit margin of Google is really high that investors think the share price of Google will go higher. On April 19,2004, Yahoo!’s 1,346,728 shares traded at $54.71, while eBay’s 657360 shares were valued at $82.04 each. After 2003, Google surpass Yahoo took about 45% share of Search Market. This factors will drove the share price higher and this expectation was realized on Google’s first day of Nasdaq, its stock gained 18% to $100.34.

Projection of financial returns: Many investors prefer to use net present valuation methods. One method is to project a company’s future cash flow and compare it to how much investors are paying for the company’s stock (CFROI). How to forecast the future financial statistics? The first way is to assume that Google would maintain a profit margin of 40%, virtually unchanged from last year’s 41%, for the next five years. But under this incredibly quick pace, Google’s yearly revenue would have to raise from $962 million in 2003 to $5.5 billion in 2008. The second way is to assume Google’s margins will deteriorate over the next five years to 28%, the mark that yahoo hit last year. Under this criterion, the revenue of Google must grow at an annual rate 59% per year, which would bring its 2008 revenue to $9.7billion. Due to the conservative revenue-recognition method of google, the profits margin of google should naturally be higher than Yahoo’s. That’s why set on a decline in Google’s EBITDA margin to 33%. In this assumption, Google should grow at an annual rate of 52.1% and the revenue of 2008 will reach $7.8 billion. Actually, the revenue of 2008 is $21.7 billion which is much higher than expected and the profit margin of 2008 is 19.4%. The positive projection of financial returns can drive the share price higher. From 2004 to 2008, the net income of Google increased about 10 times. The expectation of model was realized and was significantly exceeded.

Indications of internal company valuation: google added $75.4 million to its deferred- compensation account during the 2004. It is calculated as the excess value of the options at $75, which carried an average exercise price of $16.28. Adding these two numbers together, google valued its shares at $91. Another way is to use Black- Scholes formula that companies use to value the options they grant to employees. We can backwards to estimate the per-share value that Google must have put into formula. The fair value of the options it issued in the first quarter was $67.06, and the exercise price is $16.28. Considering other assumptions, Google valued its shares at $80.44.

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