Monday, July 19, 2010

Let's short the sun. It disappeared for ten hours yesterday.


Here's the post that I promised a few hours ago. Did you do your homework?

Sometimes I don't understand the market.

Years and years ago, when my employer (then known as Printrak International) was a publicly-traded independent company, we announced a major deal in Argentina with a potential value of $45 million. At the time, that was the biggest deal in our history. (Printrak subsequently became part of my current employer, MorphoTrak, who just announced a $47.5 million deal.) So anyways, when Printrak announced that $45 million deal...the stock price went down. Perhaps the market was expecting a $50 million deal.

Most of you aren't familiar with MorphoTrak or Printrak, but presumably you've heard of Google. I am writing this blog using software from Google. You've might have previously used them for search, or to watch videos, or something like that. TechCrunch reports that in a meeting of about 15 thought leaders, 12 of the 15 would short Google. If you read the TechCrunch piece, you will see some of their reasons - problems retaining "entrepreneurial and innovate people," no more low-hanging revenue fruit, lack of a coherent strategy, and the wrong people mix.

Certainly these are legitimate issues that need to be overcome. But does that mean that you need to short Google?

But that's not the part that really shocked me.

The part that shocked me - OK, it didn't shock me - was something in the title of the post - Is Google at Risk of Becoming the Next Microsoft? Even if Peter Sims didn't write the title, it accurately reflects his views:

That is, much like Google revolutionized search, Microsoft was a pioneer with its market-dominating operating systems and Microsoft Office. But outside the Xbox, Microsoft has struggled severely to produce new innovations. Deeper cultural problems were hidden by amazing performance and success.

Poor, struggling Microsoft. Its third quarter financial results, reported last April, indicated that Microsoft had quarterly revenue of only $14.5 billion, net income of only $4 billion, and earnings per share of only 46 cents. And its latest Windows offering, Windows 7, is clearly an abysmal failure, since Windows revenue was only up 28% vs. a year ago. Oh, and Windows 7 only has 10% of the worldwide PC market, despite its being out for several months at the time of the press release.

Do you realize what would happen if Google ended up like Microsoft?

First, Google quarterly revenue would tank, going down from $6.82 billion to...oh, wait a minute, revenue would double.

Well, the thing that really counts is income, not revenue. If Google ended up like Microsoft, net income would tank from $1.84 billion all the way down to...oh, wait, that would go up too.

But income per share, that's a different story! Google's net income per share is over five dollars! You blow big monkey chunks, Microsoft!

OK, I'm sure that there are rational reasons for these investment decisions, and some people are better off going for a quarterly revenue increase of 100% rather than steady year-by-year growth, but I still don't intuitively understand it.

That's why all these market experts are so wise, and have made so much money the last couple of years.

FCC DISCLOSURE FOR THOSE WHO MAY HAVE SKIMMED PART OF THIS POST: I am an employee of MorphoTrak, one of the companies mentioned in this post. Oh, and MorphoTrak has provided me with a computer that incorporates operating system and business software provided by Microsoft.
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