MorningWord 5/8/15: Stop Googling Yourself

by Dan May 8, 2015 9:36 am • Commentary

Yesterday we detailed a near term bullish trade in Google (New Trade – $GOOGL: I’m Feeling Lucky).  The stock has filled in the entire earnings gap. A gap that, quite frankly, I was surprised it gapped to two weeks ago following a third consecutive earnings and sales miss.

However, the premise of the bullishly biased trades is that with the start of their newly appointed CFO Ruth Porat in a couple weeks, investor focus may shift to capital return, which could be a massive catalyst for the shares:

Has Ms. Porat been hired with a $70 million pay package to figure the best way to deploy the company’s $70 billion in cash? I would suggest that is a good bet and if the company is not going to get active with M&A, at this stage of growth and rates where they are it would make sense to take on some debt, pay a dividend and buy back a lot of stock. As Ms. Porat’s May 26th start date nears I suspect we start to hear a bit more speculation about cash return (which would obviously take months, if not quarters to iron out) but it could put a bid in the stock.

Back in February, prior to the announcement of Ms. Porat’s hire from Morgan Stanley, Barron’s opined about the near term financial future of Google in a story titled Google – Time to Return Cash to Shareholders:

“Google could boost its shares 5% to 10% overnight by announcing a dividend and share-buyback program.”

The article highlighted the positive affects on other mega-cap tech stocks of capital return:

Apple’s announcement of its initial dividend and buyback program, in March 2012, boosted its shares by 3%—and that action was widely expected. Google could comfortably pay a 2% dividend yield and repurchase 3% to 5% of its shares annually. Apple (AAPL), which initially dragged its feet, has become a big convert to buybacks, having repurchased $45 billion of stock in its fiscal year ended last September. Microsoft (MSFT), which has a similar market value to Google, returned about 5% to shareholders in its latest fiscal year in dividends and buybacks.

Aside from rates being low, for now, and the attractiveness of buying back stock with essentially free money, Barron’s highlights the other benefits of capital return plan:

A dividend and buyback would broaden Google’s investor base to include institutional investors who require a dividend, and it would help the company stay competitive in the tight market for talented engineers and other key employees in Silicon Valley, to the extent it boosts the share price.

I suspect some form of capital return is coming to a theater near you as it relates to Google. And if they can somehow manage a combination of a modest dividend, $20 to $40 billion buyback and some M&A that addresses their blind-spots (real time search, social media, mobile messaging) and you will have a stock that has gone from massive under-performer back to its prior highs in a quick.

In the past we have discussed the possibility of Google unlocking some value as it relates to YouTube (MorningWord 6/30/14: Should YouTube Try Googling Itself?), and we see no shortage of creative ways the company could reinvigorate its stagnate stock price.  As Barron’s noted, outgoing CFO Patrick Pichette mentioned on their Q4 call in January that they do care about GOOGL’s stock price:

I just can reiterate the same message that I give on a regular basis, which is share price does matter. It matters to our board. It matters to all of us.…We do review this issue on a regular basis.…I just have nothing to announce today.”

Obviously we are warming to the stock, despite growing competition from Facebook and others, we think a little financial engineering, coupled with some smart m&a could have shares testing the prior highs in at some point in 2015.