Google – Real pie in the sky

RFM AvatarSmall

 

 

 

 

 

Skybox has great strategic value for Google.

  • Google wastes vast amounts of money on frivolous expenses but the acquisition Skybox is one that actually makes sense.
  • Google will pay $500m in cash to acquire Skybox which is an end to end provider of satellite imagery and analysis.
  • Skybox makes and operates a network of satellites but it also provides software analytics of the images to help customers with decision making around their assets.
  • Google’s overriding strategy is to categorise and understand the world of digital information and then make money by selling advertising.
  • The amount of information that is digitised, the better it is digitised and the more people that are using the internet are all positive drivers for Google’s revenues and Skybox can augment all three.
  • However, Google is not alone in this endeavour and there are many would be competitors snapping at its heels.
  • Hence, there is also a need to make the quality of the services that it offers to users much better than any of its competitors and this requires some degree of exclusiveness.
  • Skybox will be able to make timely enhancements to the satellite imagery of Google maps that won’t be available elsewhere.
  • Combine that with the software’s ability to track and analyse assets and I can see traffic information expanding and moving to a whole new level.
  • The Skybox satellite design will also be able to be modified to offer Internet access in very hard to reach areas or disaster zones which will also help Google pursue its dream of global Internet access.
  • I suspect that Google has overpaid for this acquisition but this does not concern me greatly as I can see great strategic value in this acquisition for Google.
  • Furthermore, $500m is but a drop in the ocean compared to the $3.2bn in excess general and administrative expenses that Google wastes every year. (See Samsung and Google – Gorilla war – 27th May 2014)
  • This issue is so acute that EBIT margins are 500bp below where they should be for a large tech company of this size.
  • The good news is that despite this shortcoming and a further discount for shortcomings in corporate governance the shares are still attractive.
  • RFM strongly prefers Google to Samsung as the best way to gain exposure to the Android ecosystem.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.