The auction-driven IPO of Internet search engine Google has provided a central theme for the financial markets for the past four months since the company filed to go public. The early ebullience has, as the NASDAQ has sold off, given way to a confused, cautious and at times caustic stance towards the company.
In the past 10 days, the company dropped its price range of $108-$135 to $85-$95. The company ended up accepting bids at $85, then opened and stayed near $100 for the first day of trading on Thursday. Yesterday, the stock rallied an additional 8% to rise from $100 to $108 where it stands now. It will be another 10 days or so before the first set of inside holders can begin selling their shares, and another 10 days after that before the legion of investment banking underwriters (CSFB, Morgan Stanley, etc) can begin providing investment research insights on the company. In the meantime, GOOG remains more of a curious cultural event than a fully analyzed public equity.
The media has swung from applauding Google’s months ago when it first filed to go public using an unorthodox auction pricing model, to lambasting the same approach in the past month. Now that the stock is public and has risen more than 20% from its offering price, the media seems to be suggesting that Google has indeed succeeded in pointing to a post-Wall Street IPO process even if it wasn’t able to properly capture the full upside of the public’s demand for its equity.
Regardless of the logistical machinations of its IPO, however, in my mind the confused perception of Google has less to do with the recent descent of the financial markets and more to do with some fundamental conflicts of the company’s own doing.
The Google Paradox.
As a consumer service, Google has built its brand on a few core values: clarity, honesty, transparency and accountability. It suggests that as a company it will "do no evil." Google's decision to adopt the open auction model pioneered by WR Hambrecht was a bold attempt to ensure that the company, not its investment bankers, captured all incremental dollars generated by interest in the IPO. Its noble purpose was to ensure that its IPO price was not set artificially low by brokers who wanted to provide access to their best customers who could then lock in immediate gains when the IPO soared way above its offering price.
It has become increasingly hard to reconcile Google's core business values with its attitude towards investors, both institutional and retail. At the core of its IPO process, Google demonstrated a further paradox: it provided tick by tick efficiency into the pricing of its shares in the open market while at the same time provided zero near-term accountability in terms of the obligations of its management to inform. Citing Berkshire Hathaway as a role model, Google has warned that it will not be a "slave to investors" and will refrain from providing quarterly guidance. At its pre-IPO road show, numerous investors and bankers commented that Google executives simply didn't care about educating investors about the key levers of the business. These contrasting behaviors simply don’t compute.
What can Google do?
The good news is that there is a simple way to address this paradox. All Google needs to do is expose its clickstream. Specifically, there are three basic levers of value in determining Google's value both absolutely and relative to its peers:
# of Sponsored Clicks
Average Cost per Sponsored Click
These are important metrics because it will allow investors to understand how Google is faring against its arch rival (for now at least) Yahoo! According to comScore as well as our internal data at Majestic Research, Google has managed to grab 35% of all domestic searches in the past 6 months (January-June) while Yahoo! Has managed to grab 29%. Internationally, however, Google captures 55% while Yahoo! Only holds 26% share. Yahoo! has seen the cost that it charges per sponsored click start to flatten, and it is unclear if Google is suffering from the same fate. AOL/Netscape, Ask Jeeves and MSN all boast higher ratios of searches with sponsored ads (the degree to which a company is able to monetize its search activity) which suggests that Google has upside potential, although at the risk of commodifying what makes it such a uniquely satisfying consumer service—the perceived purity of its algorithmic search results.
Interestingly, both Yahoo! and Google generate the majority of their search results from one and two word searches. This behavior is perhaps an outgrowth of the single word directory clicking that predated the emergence of keyword search as the dominant internet behavioral paradigm. One question that remains is whether the sort of natural language search that Microsoft has discussed incorporating into its upcoming Longhorn operating system will be precisely the sort of technology iteration that Microsoft achieved with subsequent versions of IE over Netscape Navigator.
We released our inaugural report on Google earlier this week that comments on these and other trends impacting Google's business. If you are an investor, author or search engine expert and would like a copy of the report, please let me know.
Majestic Research is one of a number of independent research firms that provide investors with transparency into companies that otherwise don't expose their fundamental performance. Like others, we use primary information to address the ironic consequences of Regulation Fair Disclosure and the Spitzer settlements: companies and analysts today are saying less, not more. Corporations and their investment research counterparts have an obligation to educate investors about fundamental trends on a real-time basis. With the advent of the Internet, it is no longer necessary to wait three months for management to collect its results and report on what has happened. Companies, particularly those like Google, Yahoo and IACI that are Internet companies should be telling investors how they are doing as they are doing it.
Sergey and Larry, if you really want to avoid evil, just show us your clicks.