Google recently announced that they are reconsidering their operations in China as a result of a recent, very sophisticated cyber attack on their corporate infrastructure. They believe the attack was targeting information, such as e-mails, names, etc., about human rights activists in China. While not explicitly stated by Google, there is some concern that the Chinese government itself may have launched this attack to obtain the information.
Google has basically said this is the last straw. They were never really comfortable censoring some search results, a prerequisite for providing their services in China. This recent attack, regardless of source, has made them remember their famous slogan, “Don’t be evil.” They have now laid down the gauntlet and are going to the Chinese government with this ultimatum: either allow us to not censor our results or we are closing shop in China.
Why is this good news? As soon as I heard the news, I immediately thought of 3 reasons:
1. While we are 100% capitalist, it might surprise some who don’t understand capitalism to know that pure capitalism is ethical and fair. A pure capitalist wants to play within the rules, act with integrity and ethics, and profit with a clear conscience. Capitalism, to us anyway, is about creating value, and value by its nature is long-term, stalwart, and nothing long-lasting can be created without integrity. While all good things eventually fail, bad things fail even faster (much more incentive by those affected to get rid of it). Google’s ultimatum shows that they care about integrity, about value. They will gladly walk away from whatever profits they earn in China today to avoid the situation where they are used as a tool to hurt or suppress a particular group of people who, in their eyes, are trying to make life better for those around them. If Google was successfully used in such a way, their brand name and culture, the source of much of their competitive strength, would likely be irreparably damaged. They are taking the steps necessary now to help ensure their long-term success worldwide. Simply put, integrity is always good business.
2. There has been a lot of negative press about Google lately, pretty much all of which is unfounded. It is primarily driven by people who don’t understand pure capitalism as we do and would prefer a company motivated almost entirely by something other than growing long-term value for its shareholders (I am not really sure what they want other than for Google to not be driven by growing profits). Hopefully this will allow those “purists” and the shareholders to be on the same side of the table, at least for the time being.
3. Most importantly of all, at least as it effects Booth-Laird directly, the news has caused Google’s stock price to drop. This is the best news of all for us. Why, you ask? The answer is very simple. Google’s core business is completely unchanged. They are the same company fundamentally today as they were yesterday. The only difference is how they approach China, which seems to be a very small portion of their overall operations. I haven’t been able to find specific numbers from the company in my 30 minutes of research thus far on how much of its revenue or, more importantly, its free cash flow was generated from China. That in itself tells me that it isn’t all that much or that exciting. Generally, if a company is seeing mind-numbing growth or profit from an area of the world as “sexy” as China is today (pre-yesterday’s news), they tell you about it. If they don’t say anything about it, then it likely isn’t all that mind-numbing. One analyst I saw said it’s only $100-200 million in revenue. For a $20 billion/year company, that’s a drop in the bucket. Some people have baked into their valuations or analysis a lot of growth originating from China, but when the starting point is 1% of the company’s total revenue, that’s adding very little, if any, to the valuation. Google still realizes 50% of its revenue from the U.S. and is in many other parts of the world that are growing rapidly. China, while big, is but one country where Google had not made much headway yet. So the stock price dropped based on news that in no way hampers Google’s ability to compete worldwide and represents a very small portion of the company overall. In short, the valuation has stayed the same while the price has dropped. This is our dream situation. We live for moments like this because they represent such an easy profit opportunity.
Now, if only the naysayers would cooperate and sell their shares to the point where the price is very attractive relative to our value (such as, say, 25% below our current valuation). If that happens, we buy the stock, reason is ultimately restored to Google’s shareholders, the price goes back up to near our valuation, and we’ve made a quick 25% for maintaining a cool head and a long-term perspective throughout the whole ordeal.