Thursday, May 31, 2007

The Other Eric

My post, What does Eric Know, was featured Eric Sprott, and basically buying Roca at that time, when the market cap was about 1/3rd of what it is now, could make you lots of money.

The other Eric is Eric Schmidt of Google. He just cashed in and sold 57,084 option and sold them on the same day for an average price of $481.97, for $27.5 million.

Google is a great company, but it needs to at least double its revenue to support its current price, not an easy feat for a very large company.

End of post.


NonyMous said...

Your link to 'What does Eric know' see, to be broken...just thought you should know!!

Deborah said...

Thanks, I fixed it.

Joe_5000 said...

GOOG must double profits, not revenues, to get a reasonable PE of 20. Since they have an eminently scalable business model with few variable costs, they probably only need to increase revenue from its current $12 billion (profit of almost $4 billion) to $16 billion. This is only a 33% increase.

Deborah said...

Right Joe, it is a doubling of earnings not sales and it can be expected to see some leverage on those earnings.

You promoted me to have a closer look as to how the sales growth is playing out in the earnings.

June 06 - 29.3% of revenue ended up as earnings.

Sept 06 - 27.3% of revenue ended up as earnings.

Dec 06 - 32.2% of revenue ended up as earnings.

Mar 07 - 27.4% of revenue ended up as earnings.

With looking at annual data, 2004 23% ended up as revenue.

With 2005 23.9% ended up as revenue.

With 2006 29.0% ended up as revenue.

Certainly the annual data more than the quarterly data supports the position that the margin is improving and there is leverage of earnings.

So, today the undiluted market cap is $156 billion. 5% is $7.8 billion. $7.8/$16 x100% means 49% of revenue has to make it to earnings to get to 5% on $16 billion of revenue, and that requires that they do no further dilution of stock.

I personally do not see that as doable, especially since Q1-07 had 3.7 billion in revenue, a 14% increase over Q4-06 and a roughly 2.7% decline in earnings.

The taxes were way up and it looks to me that that would take some real looking into it to figure out what is happening there.

I also just had a superficial look at their financing and "Sale Purchase of Stock." That looks like new equity issuing to me and it would take hours to research what they did there. But, it says $1.2 billion in 2004, $4.4 billion in 2005, $2.4 billion in 2006. That doesn't look good to me and I think puts a major kink in the valuation model people are using.