5 ms·

Earnings multiples reflect the amount of future earnings growth. He laid out an argument for larger future earnings growth.

by gibybo 8y ago

darawk 8y ago
None of the growth oriented items he listed are even remotely capable of justifying 2x the multiple of other media companies.
- throwawaymath 8y ago
  Why do you say that?
  - darawk 8y ago
    Where's it going to come from? Here's the options I see: 1. More users. This is pretty tapped out for Google. Yes, more people will come online in developing countries, but those people will also gain access to say Disney content. So, world GDP growth is already largely priced into the multiple's of other companies too. 2. Higher ad density. I don't see a lot of opportunity for Google to substantially increase it's ad density. Reasonable people might differ here, but I think they're already fairly dense. 3. Higher ad quality / spend efficiency. This cuts both ways for them. Right now advertisers spend a lot of money on AdWords inefficiently. If Google can optimize their spend, they'll pay less in aggregate, but they may be willing to pay more per ad. Which, in turn, will allow the ad density to be more globally efficient, if Google can replace the lost volume with other advertisers who will also pay more. There is probably room here, but it's speculative, and I don't think the growth potential is enormous. 4. Reducing costs. Google's gross margins are already tremendous (63%), you could cut their costs to zero and you wouldn't even double their profit.
- MarkMc 8y ago
  I'm not too familiar with other media companies so I don't know what the correct multiple should be, but here's my math on Google: 1. Over the past 13 years world GDP per capita has grown about 3% per year. So it's reasonable to think that the people who are currently connected to the internet will on average be 30% richer in 10 years 2. The average amount of time that people spend on the internet could grow 20% in 10 years 3. The amount of advertising Google can show per hour might be 20% higher in 10 years 4. Google might improve its ad algorithm 10% per year - ie. 160% over 10 years. 5. Having more personal data might improve Google's ad algorithm by a further 10% over 10 years 6. Most extra people connected to the internet over the next 10 years will be much poorer than existing users, so let's say that this growth only contributes 10% to revenue over 10 years Estimated revenue growth is therefore: 1.3 * 1.2 * 1.2 * 2.6 * 1.1 * 1.1 = 5.9 But there is also the chance of significant regulation and other risk factors so let's cut that revenue growth estimate in half to 3. Google won't need 3 times the number of engineers or data centers to service that growth, so Google might be reasonably expected to quadruple its profit in 10 years.
  - darawk 8y ago
    > 1. Over the past 13 years world GDP per capita has grown about 3% per year. So it's reasonable to think that the people who are currently connected to the internet will on average be 30% richer in 10 years A bit more from compounding, but ya. However, that's priced into every company's multiple. > 2. The average amount of time that people spend on the internet could grow 20% in 10 years And you think Google will capture all of that? > 3. The amount of advertising Google can show per hour might be 20% higher in 10 years Why? > 4. Google might improve its ad algorithm 10% per year - ie. 160% over 10 years. 10% more profitable every year for 10 years? I'm not going to say that can't possibly happen, but you'd have to walk me through the physics of exactly how you think that's possible. Do keep in mind that Google makes money by showing people ads. They can increase their profits by: 1. Showing more ads per user 2. Getting more users 3. Charging more for ads (to do this, they'd have to improve efficacy, which, by the way, they don't capture all of because part of the surplus efficiency the advertisers will want for themselves) 4. Reducing their costs I don't really see room for 160% growth no matter how you divide it amongst these things, unless, as the author of the original article pointed out, Google captures brand advertisers.
    - MarkMc 8y ago
      >> 2. The average amount of time that people spend on the internet could grow 20% in 10 years > And you think Google will capture all of that? No, but it's reasonable to think that Google will capture a share of that growth in proportion to their current share. >> 3. The amount of advertising Google can show per hour might be 20% higher in 10 years > Why? See my earlier comment about Youtube and The Economist. There's also the chance that Twitter decides to outsource their ads to Google. > > 4. Google might improve its ad algorithm 10% per year - ie. 160% over 10 years. > 10% more profitable every year for 10 years? I'm not going to say that can't possibly happen, but you'd have to walk me through the physics of exactly how you think that's possible. Do keep in mind that Google makes money by showing people ads. They can increase their profits by: > 1. Showing more ads per user > 2. Getting more users > 3. Charging more for ads (to do this, they'd have to improve efficacy, which, by the way, they don't capture all of because part of the surplus efficiency the advertisers will want for themselves) > 4. Reducing their costs When I say "improve its ad algorithm" I'm talking about improving the match between the viewer and the advertiser - and therefore being able to charge more for ads. Based on my personal experience with Google ads I think there's a lot of room for improvement. Here are some examples in addition to the cat food example I gave earlier: (a) Last year I demonstrated interested in buying a Pixel 2 phone, so Google started showing me Pixel 2 ads. Fair enough. But then it kept showing me the ads even after I had purchased the phone and was viewing the ads on a Pixel 2 phone (b) Last year I wanted to buy a Macbook Pro, and I went as far as configuring it on the Apple website and putting it in my shopping cart. But then I got cold feet and didn't buy it for 6 months. In that time I never once saw an ad on Facebook or Google for Macbook Pros. Apple were leaving a lot of money on the table by not hooking up with Google. (c) Google shows me sports betting ads all the time, despite the fact that I've never been in a betting shop or placed an online bet. (Google has 4 years of my location history and 14 years worth of my email history) (d) Earlier this year I was shown an ad for Audible every single time I opened YouTube. I must have seen 20 ads per day for the same product. It was very annoying and I suspect Google would make more money by showing a variety of ads (e) When I buy an airline flight Google adds it to my calendar but still shows me ads for that flight. (f) Browsing the New York Times app just now I'm shown a "Quit Smoking" ad despite the fact that I've never smoked in my life. (g) I read about a Facebook user who is vegan but saw in her Facebook profile that one of the advertisers specifically targeting her was KFC.

Earnings multiples reflect the amount of future earnings growth. He laid out an argument for larger future earnings growth.

by gibybo 8y ago

Earnings multiples reflect the amount of future earnings growth. He laid out an argument for larger future earnings growth.

darawk 8y ago

None of the growth oriented items he listed are even remotely capable of justifying 2x the multiple of other media companies.

throwawaymath 8y ago
Why do you say that?
- darawk 8y ago
  Where's it going to come from? Here's the options I see: 1. More users. This is pretty tapped out for Google. Yes, more people will come online in developing countries, but those people will also gain access to say Disney content. So, world GDP growth is already largely priced into the multiple's of other companies too. 2. Higher ad density. I don't see a lot of opportunity for Google to substantially increase it's ad density. Reasonable people might differ here, but I think they're already fairly dense. 3. Higher ad quality / spend efficiency. This cuts both ways for them. Right now advertisers spend a lot of money on AdWords inefficiently. If Google can optimize their spend, they'll pay less in aggregate, but they may be willing to pay more per ad. Which, in turn, will allow the ad density to be more globally efficient, if Google can replace the lost volume with other advertisers who will also pay more. There is probably room here, but it's speculative, and I don't think the growth potential is enormous. 4. Reducing costs. Google's gross margins are already tremendous (63%), you could cut their costs to zero and you wouldn't even double their profit.
MarkMc 8y ago
I'm not too familiar with other media companies so I don't know what the correct multiple should be, but here's my math on Google: 1. Over the past 13 years world GDP per capita has grown about 3% per year. So it's reasonable to think that the people who are currently connected to the internet will on average be 30% richer in 10 years 2. The average amount of time that people spend on the internet could grow 20% in 10 years 3. The amount of advertising Google can show per hour might be 20% higher in 10 years 4. Google might improve its ad algorithm 10% per year - ie. 160% over 10 years. 5. Having more personal data might improve Google's ad algorithm by a further 10% over 10 years 6. Most extra people connected to the internet over the next 10 years will be much poorer than existing users, so let's say that this growth only contributes 10% to revenue over 10 years Estimated revenue growth is therefore: 1.3 * 1.2 * 1.2 * 2.6 * 1.1 * 1.1 = 5.9 But there is also the chance of significant regulation and other risk factors so let's cut that revenue growth estimate in half to 3. Google won't need 3 times the number of engineers or data centers to service that growth, so Google might be reasonably expected to quadruple its profit in 10 years.
- darawk 8y ago
  > 1. Over the past 13 years world GDP per capita has grown about 3% per year. So it's reasonable to think that the people who are currently connected to the internet will on average be 30% richer in 10 years A bit more from compounding, but ya. However, that's priced into every company's multiple. > 2. The average amount of time that people spend on the internet could grow 20% in 10 years And you think Google will capture all of that? > 3. The amount of advertising Google can show per hour might be 20% higher in 10 years Why? > 4. Google might improve its ad algorithm 10% per year - ie. 160% over 10 years. 10% more profitable every year for 10 years? I'm not going to say that can't possibly happen, but you'd have to walk me through the physics of exactly how you think that's possible. Do keep in mind that Google makes money by showing people ads. They can increase their profits by: 1. Showing more ads per user 2. Getting more users 3. Charging more for ads (to do this, they'd have to improve efficacy, which, by the way, they don't capture all of because part of the surplus efficiency the advertisers will want for themselves) 4. Reducing their costs I don't really see room for 160% growth no matter how you divide it amongst these things, unless, as the author of the original article pointed out, Google captures brand advertisers.
  - MarkMc 8y ago
    >> 2. The average amount of time that people spend on the internet could grow 20% in 10 years > And you think Google will capture all of that? No, but it's reasonable to think that Google will capture a share of that growth in proportion to their current share. >> 3. The amount of advertising Google can show per hour might be 20% higher in 10 years > Why? See my earlier comment about Youtube and The Economist. There's also the chance that Twitter decides to outsource their ads to Google. > > 4. Google might improve its ad algorithm 10% per year - ie. 160% over 10 years. > 10% more profitable every year for 10 years? I'm not going to say that can't possibly happen, but you'd have to walk me through the physics of exactly how you think that's possible. Do keep in mind that Google makes money by showing people ads. They can increase their profits by: > 1. Showing more ads per user > 2. Getting more users > 3. Charging more for ads (to do this, they'd have to improve efficacy, which, by the way, they don't capture all of because part of the surplus efficiency the advertisers will want for themselves) > 4. Reducing their costs When I say "improve its ad algorithm" I'm talking about improving the match between the viewer and the advertiser - and therefore being able to charge more for ads. Based on my personal experience with Google ads I think there's a lot of room for improvement. Here are some examples in addition to the cat food example I gave earlier: (a) Last year I demonstrated interested in buying a Pixel 2 phone, so Google started showing me Pixel 2 ads. Fair enough. But then it kept showing me the ads even after I had purchased the phone and was viewing the ads on a Pixel 2 phone (b) Last year I wanted to buy a Macbook Pro, and I went as far as configuring it on the Apple website and putting it in my shopping cart. But then I got cold feet and didn't buy it for 6 months. In that time I never once saw an ad on Facebook or Google for Macbook Pros. Apple were leaving a lot of money on the table by not hooking up with Google. (c) Google shows me sports betting ads all the time, despite the fact that I've never been in a betting shop or placed an online bet. (Google has 4 years of my location history and 14 years worth of my email history) (d) Earlier this year I was shown an ad for Audible every single time I opened YouTube. I must have seen 20 ads per day for the same product. It was very annoying and I suspect Google would make more money by showing a variety of ads (e) When I buy an airline flight Google adds it to my calendar but still shows me ads for that flight. (f) Browsing the New York Times app just now I'm shown a "Quit Smoking" ad despite the fact that I've never smoked in my life. (g) I read about a Facebook user who is vegan but saw in her Facebook profile that one of the advertisers specifically targeting her was KFC.