[bobz]

I think this makes a lot of sense. I believe the company is better tightly held, but this will allow them to do "start-upy" things like continuing to grant large equity bonuses without diluting the company control.

I'm curious to see how much those voting rights will end up being worth. Assuming the two classes have the same payout "precedence" and receive the same dividends, any share price difference will be attributable to that voting right. (Probably not worth very much I would imagine, but someone could speculate that they will be more valuable in the future where a takeover was possible).

[dpark]

> and receive the same dividends

Yeah, they'll probably be the same there, at $0/year.

I think there will be a slight skew toward the voting shares, but probably not a lot, since a vote at GOOG doesn't presently do anything.

[jimmyvanhalen]

On a related note:

I really think analysts aren't looking at Google's income statement properly. I don't think Google is doing some kind of financial engineering, but their numbers doesn't look that great if you look closely:

1st Q 2011 GAAP net income $2.3B (adjusted to $1.8B after DOJ investigation, we'll use $2.3B anyway).

1st Q 2012 GAAP net income $2.89B

~$600 Million increase in GAAP net income.

BUT WAIT

1st Q 2012 Traffic acquisition cost totaled $2.51 billion

1st Q 2011 Traffic acquisition cost totaled $2.04 billion

~$500 Million increase in TAC

Google had to spend an additional $500 Million to earn an additional $600 Million net income. And it's the same thing if you compare other quarters YOY. The increase in TAC is almost equal to the amount of increase in net income. It's easier for Google to just withdraw money from it's own bank account and deposit it to another one and call it "net income". ;) jk

[pessimist]

Net income is after subtracting TAC. Revenues increased by $2.1b, so Google paid $500m to acquire $2.1b in revenue. Of the $1.6b in "real" revenue growth, they made around $600m in profits. In other words their profit margin is roughly 40%.

Also if you're worried about such shenanigans, you can look at free-cash-flow, which was $3.1B for the quarter (astonishing for any non-oil/AAPL company).

[jimmyvanhalen]

>Net income is after subtracting TAC.

I'm aware Net income is subtracted after TAC.

>Revenues increased by $2.1b, so Google paid $500m to acquire $2.1b in revenue. Of the $1.6b in "real" revenue growth, they made around $600m in profits. In other words their profit margin is roughly 40%.

You didn't address my original post. Google's net income grew almost AS MUCH as the increase in TAC. and it's the same pattern for years. and Google's TAC has been steadily increasing over the years. I'd be more impressed if net income increased but TAC decreased.

Also I wouldn't focus on Revenue since Google's revenue INCLUDES their TAC.

> Also if you're worried about such shenanigans, you can look at free-cash-flow, which was $3.1B for the quarter (astonishing for any non-oil/AAPL company).

A limitation of using free cash flow versus the GAAP measure of net cash provided by operating activities as a means for evaluating Google is that free cash flow does not represent the total increase or decrease in the cash balance from operations for the period because it excludes cash used for capital expenditures during the period.

And if you're going to talk about free cash flow, look at Google's return on invested capital.

Google's 5-year average ROIC is only 17.1% and currently it's only at 15.9%.

[nostrademons]

TAC is largely AdSense partner payouts - and likely things like Chrome distribution deals and Android partner agreements now. Saying "net income grew almost as much as TAC" is basically saying "Google's AdSense, Chrome, and Android businesses are a healthy and growing segment of its total revenues."

Note that you can spin this to look bad for Google either way. If TAC was low, it'd be "Google gyps their AdSense partners, and soon there'll be a publisher revolt", something I've occasionally seen complained about on HN. If TAC is high, it's "Google's numbers don't look good; clearly their business is in trouble." The numbers are what they are; if you want a useful picture of whether to invest, you need to understand the business better than that.

[jimmyvanhalen]

I'm not trying to spin this to make Google look bad.

It just looks like that their spending an awful lot of money to arrive at a net income which is almost equal to the amount of money they spent.

[pessimist]

First you said - "It's easier for Google to just withdraw money from it's own bank account and deposit it to another one and call it "net income"." This is absolute nonsense, and what I was responding to.

It may well be that increasing TAC % implies a worse business for Google, but thats certainly not what your original point was.

[jimmyvanhalen]

that was a joke ;)

[jcampbell1]

How is a 120% ROI in 1 quarter a problem? You just let me know where I can spend $500M and get $1.1B back in the same quarter.

I have no idea what point you are making.

[jcampbell1]

It doesn't matter what the dividends are today. A rational stock valuation is the NPV of all future dividends. There must be a guarantee that dividends will be paid equally, otherwise there would be no rational way to price the class C stock.

In short, the class C stock must have identical dividends to the other classes.

[sopooneo]

I have been looking for this answer since I first heard about the idea of stock as a kid. No one else could ever provide it. Thank you.

"A rational stock valuation is the NPV of all future dividends"

[dpark]

Don't get too wrapped up in that answer. It assumes that investors are rational and able to see the future, when they are neither. Stock value is based on the same thing as everything else: what someone else will pay. Stock prices are no more rational than home prices.

[jcampbell1]

False. There is plenty of dispute about the NPV of all future dividends and the discount rate, but the notion is a fundamental truth. It is follows from basic math and is provable.

[dereg]

You would have done well at Lehman Brothers, really really well.

[joshu]

indeed. pretty much all the points arguing with you are actually just discussing ways to value npv.

[dpark]

It's provable? Please enlighten me.

[jcampbell1]

You are welcome. When you buy a stock, you are buying two things: rights to the profits (via dividends), and rights to manage the company (stock voting). Most people you encounter don't undersand stocks at all, and I'll likely be downvoted to hell, but those fools are wrong. Don't listen.

Valuation is a super complicated subject, but what stock represents is a simple fact.

[dereg]

You're wrong. You're oversimplifying stock valuation to a hazard. You cannot use the dividend discount model to value stocks that pay no dividends. This is a fact. Furthermore, a dividend is not the only source of return from a stock, there's also capital appreciation. A stock appreciates for various reasons including investor sentiment and share repurchases (another way for a company to distribute profits). Also, you don't necessarily receive a voting right for a common share.

Like you said, valuation is a super complicated subject so don't mislead others with an incorrect simplification of it.

[prodigal_erik]

Of course you can, you just may not enjoy the answer. Without dividends, there's no actual mechanism for corporate success to benefit shareholders, there's only how "investors" assume each other will probably react to the news. Even share buybacks are priced through this hall of mirrors. A rational valuation is not an attempt to predict where the speculators' random walk will be at some point (there's every sign that can't be done) but the amount you can pay in confidence of ending up with a profit regardless of all that, based solely on how the company plans to reward buy-and-hold investors. These days the answer is often "only speculators think these shares should have any value", and Mark Cuban astutely likened those stocks to baseball cards.

[sopooneo]

But why would capital appreciation matter if the stock holder never gets to take that capitol? Aside from voting rights, if you assume a stock will never pay dividends, I don't understand how it would have any value at all.

[dpark]

> A rational stock valuation is the NPV of all future dividends.

Investors are not rational. Nor are they able to see the future. Future dividends have next to nothing to do with the present price of GOOG.

> There must be a guarantee that dividends will be paid equally, otherwise there would be no rational way to price the class C stock

What kind of guarantee would you imagine is meaningful in a world where 3 people control all decisions? If they promise today that dividends will be equally split, what stops them from tomorrow saying that class C gets no dividends?

[jcampbell1]

> Investors are not rational. Nor are they able to see the future. Future dividends have next to nothing to do with the present price of GOOG.

Blah, blah, blah. Let's assume google issued a share that had 1/10 dividend rights and 1/10 voting rights. What would the value of the share be?

A share of stock confers two things. Voting rights, and dividend rights. That is what people are buying. Voting, and dividends.

> If they promise today that dividends will be equally split, what stops them from tomorrow saying that class C gets no dividends?

bylaws

[dpark]

> Let's assume google issued a share that had 1/10 dividend rights and 1/10 voting rights. What would the value of the share be?

A lot more than 1/10 of a standard share, because dividends and voting rights are not the only things of value with respect to a company. In particular, there's also the potential for acquisitions and mergers.

> A share of stock confers two things. Voting rights, and dividend rights. That is what people are buying. Voting, and dividends.

A share of stock confers partial ownership of the company. That's what it confers. It might come with voting rights (or not), and it might come with dividend rights (or not).

Are you actually operating under the belief that the new class of Google will have zero value unless Google eventually issues dividends?

> bylaws

You mean the bylaws that Larry, Eric, and Sergey can change due to their supermajority voting control?

[Drbble]

You should check how much dividend the former shareholders of Instagram or Plumtree received.

[adrianbg]

I have longstanding confusion on this subject. What if dividends are never paid? To my layman's intuition it seems like a more sensible basis for stock valuation is as a fraction of the value of the entire company. This is only equivalent to your definition if profit is equivalent to dividends.. right?

[coopdog]

If they were never paid one day either the company finally dies or it gets wound up. On wind up day, assuming the company was profitable there'd be one huge pay out (ie dividend)

More realistically if you look at Microsoft and Apple, they were trying to never pay dividends, but they finally just had so much cash it was the only sensible thing to do

[adrianbg]

I don't agree. A company can never pay dividends then be bought out by a company that also never pays dividends.

I'm thinking now that there are two components to a stock's value: a concrete component, since a share represents a part of the company, and a volatile abstract component depending on the amount of market demand for it at the moment (eg. in case of a hostile takeover).