This column was originally published on RealMoney on Aug. 19 at 1:39 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
plans to raise a whopping $4 billion in an equity offering. That's a whole lot of money for its coffers, and the news rightly garnered all kinds of buzz on Wall Street, and it's got me looking to get longer the stock here.
First let's put some perspective on the amount of money that we're talking about. Four billion dollars is more than 10% of
combined stock market capitalizations. That's right, shares of Google, a company that's been in existence for less than a decade, are worth more than twice the two largest car vendors in the world -- again, combined. (Yes, I'm ignoring the hundreds of billions of dollars of debt on the car companies' balance sheets.)
Google, since it came public, has handled its relations with Wall Street like a rebellious teen-ager to its parents. The company doesn't communicate often, and when it does, and it leaves the Street confounded and confused. And here we are again, confounded and confused about why this company would want to take down another $4 billion in cash. So what the heck does Google, which is already generating hundreds of millions of cash each quarter and has nearly $2 billion of cash and no debt on the balance sheet, need with another $4 billion.
Street Speculates as Google Counts
The most popular explanation from the talking heads and Google-ites is that the company's going to use the cash for acquisitions. In its
filing, the company does cite the potential of using this cash for acquisitions, and that seems to be pretty much the basis for these theories. I wrote in
several months ago that Google was kicking around the idea of getting full-fledged into offering voice services over the Internet, including exploring buying existing VoIP companies like Skype or Vonage.
In the months since then, I haven't heard that Google's taken that exploration much further, and I don't think Google will get into the VoIP business -- but with these guys I wouldn't rule anything out either.
Then there's the possibility that Google's going to acquire a video technology company such as
. Sure. Raising $4 billion to buy a Tivo, currently valued at a few hundred million dollars is equivalent to using a tank to kill a spider. It'd work, but it's a little over the top.
And I don't think Google's about to use that cash to roll up a bunch of companies either. With the stock trading at the 50x multiple on next year's earnings estimates, the stock is great currency to use for the acquisitions anyway.
I see two potential explanations for Google's big money raise here as the most likely scenarios.
The company's quietly been raising its capital expenditure budget since it came public, currently budgeting about $700 million for capex in 2005. Om Malik recently postulated in Business 2.0 that Google might create a nationwide WiFi Internet network for consumers. Any such strategy would require a major boost to capex, and maybe Google's stocking the coffers in preparation for that next big spending push.
Or, it's possible that Google's just being rationally conservative here by taking advantage of their huge market cap and huge multiple to build up a cushion of security. Cramer often writes, "sell when you can, not when you have to", and Google could very well be doing just that, taking advantage of the opportunity to build up its nest egg while the valuation is skyhigh. Even great companies stocks collapse sometimes, and neither Google nor anybody else knows for certain whether Google will stumble and see its stock crash at some point. Though I doubt such a collapse (and I'm sure management doubts it too), building up a cushion while the stock's so hot, is certainly not a bad idea.
Most likely though, I think Google's got some big capex plans that are likely to take the company into entirely new businesses, perhaps including wireless Internet access, video storage and blogging support, new video services.
I've been mostly hedged in my Google long position since the stock got up to around $300 or so. I'm covering my short common and opening back up my calls as I think any big announcements of new directions for this company are more likely to juice this stock than to crush it.
P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our
premium Web site, where you'll get in-depth commentary
money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice --
At time of publication, the firm in which Willard is a partner was long Google calls, although positions can change at any time and without notice.
Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney.
He also produces a premium product for TheStreet.com called
The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. At time of publication, the firm in which Willard is a partner had no positions in any of the securities mentioned in this column, although positions can change at any time and without notice. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback --
to send him an email.