https://www.statista.com/statistics/289659/youtube-share-of-...
Search is 58% of revenue but I'd still call it at least a 4 product company with the "other" products contributing a decent 11%.
If you want, you can stretch their products to ads, cloud, and play store. But ads are still 80% of the whole pie. More if one accepts that some percentage of youtube subscribers are only paying to get rid of ads.
Yes! I agree with this entirely. Google is the behemoth of mediocrity, the McDonald’s of tech companies. All their products are good enough to deter competition and to keep feeding search, and not an ounce better. Humans and human attention are just grist for their mill.
I must say that's one of the most unorthodox description of what a company does I've seen.
How is a bread factory or a plumber "turning risk into money"? It sounds like you're describing an insurance company or a bank, not, you know a company like Google who produces free software & services to billions of people in exchange for monetizing their attention. Focusing on risk mitigation in a company is explicitly optimizing for protecting existing income stream at the expense of innovation, customers, and new income streams. It's not what "any company does": it's what uninspired companies who have lost their ways focus on.
It sounds like what a consultant used to "financialize" everything would say to solve Google's problems and slowly turn it into an intangible conglomerate like GE who is just the shadow of its previous self. But maybe this time has arrived for Google?
You can think about arbitrarily risk-neutral enterprises that are profitable. For example, what risk is a residential REIT taking, especially one whose properties are all insured? By contrast, you can look at a business like a casino (or a catastrophe reinsurer), where it is legitimately the case that operating income is predominantly the result of risk-taking. But when you put the two side by side, there is not a huge difference in ROIC (Return on Invested Capital), which you might've expected if profits were fundamentally a risk premium.
If you actually believe that a residential REIT is zero-risk and a casino is high-risk but they have the same ROIC, you should buy REITs and short casinos and you can make a big profit. That illustrates why there's probably a flaw in your understanding (though not necessarily! you might be able to make a big profit!). The market should have the same logic, and if this is actually true, REITs will be bid up and casinos bid down until the ROIC on casinos is higher than on REITs, appropriately compensating investors.
FWIW, REITs face a lot of significant risks, eg. a regional downturn could lead to all the workers becoming unemployed and vacating or not paying rent, or a rise in interest rates could increase financing costs, or rent control might be enacted and prevent the property management from raising rents as much as financial models predict. And casinos are actually much less risky than assumed: most gambling games have statistical models for how much they pay out, and with millions of games played reality tends to approximate the models very closely (due to the central limit theorem), and they tend to take out insurance on extreme black swan events anyway. I don't know the ROICs on either of these industries in detail, but I suspect that if it's similar, it's because the actual risks to them are similar.
No, the return on an investment security (in this case, a share of publicly traded stock) is different from the return on a dollar actually invested in the underlying business (i.e., ROIC). This has a lot to do with the price action that you outline.
The rest of your comment deals with why these are bad toy examples, which is fine but not really all that interesting in context.
(As an aside, the EMH is obviously false and you don't need to look any further than meme stocks for evidence, but anyway)
For example, suppose you have two businesses, both of them have a future cash flow NPV of $1 billion. However, one of them was started in a garage with $1 million of angel money. The other one is a "fallen unicorn" that got $500 million of VC money before it finally IPOed.
The ROIC of the first company is obviously going to be something like 500x the second, but this is irrelevant to their market caps, which should be the same in textbook-EMH-land, ceteris paribus.
To the extent that it hedges them rationally, they have exactly the same expectation profit. But the bread factory that hedges its future wheat purchases has a lower real profit than the one that does not, assuming the price of wheat doesn't go up, because buying those futures contracts costs money. That's what it means to turn risk into money: if you are willing to bear the costs of things turning out poorly, you can avoid the costs of avoiding the chance of things going poorly, and increase your profit by the same amount.
And while lots of businesses do hedge their inputs to some degree, it is not the case that everyone does it to the maximal possible extent.
... no? Just because you've eliminated price risk doesn't mean you've eliminated holistic market risk. For example, suppose you're an airline: if fuel prices go up, and your competitors are not hedged, it's no big deal if you're not hedged, because everyone just increases ticket prices. But suppose you ARE hedged, and your competitors aren't, and fuel prices go down, and your competition cuts ticket prices, and... uh, you're screwed, because 1) you have a bunch of fuel locked in at the higher price, and 2) nobody wants to buy your tickets with the old fuel surcharges. So you're forced to take a loss, and the hedge hasn't actually reduced business risk in this scenario. It tends to depend on the game-theoretic context whether hedging commodity inputs actually reduces systematic risk.
Seriously, hedging price risk in commodities is nearly costless, decisions not to hedge almost never have to do with the actual cost of the hedge. In the real world where things are much more complicated than a toy example, many airlines do some hedging, with the aim of reducing sensitivity of profits to short-run volatility in oil, rather than trying to truly eliminate exposure to fuel prices. But that does come as a "free lunch".
No, they don't. I'm wondering where people get these ideas.
GP's description is actually quite astute. The legal concept of a "corporation" exists solely to pool risk and limit downside; it originally came from shipping voyages in the early age of colonialism, where a significant portion of vessels simply sank with all hands, but one successful voyage would make everyone involved wealthy beyond belief. Basically every business endeavor you do involves some risk, because the future is unknowable. The plumber might fall into the sewers and drown, the bread factory might be contaminated with E-coli and get shut down by public health after getting sued by all the customers it got sick. But certain endeavors, the ones like the plumber or the bread factory, have largely been studied, systematized, and structured to maximize the chance of success. These are low risk, but they're also low reward, because low risk invites lots of competitors. Other endeavors like writing complex software systems or predicting financial markets fail all the time, and that's why succeeding at them is so lucrative.
On the other end of the spectrum, there are very high risk businesses with no innovation and stiff competition (e.g. dealing illegal drugs).
Your argument is just about investment diversity, not about the purpose of a company.
This made me laugh out loud. I'd say drug dealing is one of the most innovative businesses around. At the high level, cartels are constantly inventing new methods of smuggling and money laundering. At a low level, dealers were first adopters for text messengers, crypto messengers, cryptocurrency marketplaces etc. I'd say this makes them more innovative than most startups (who often just re-invent traditional business but done online). Dealers even make profits!
“Using a burner phone” is a 20+ year old trope and it was pay phones before that. Not exactly innovation.
The people that made crypto currency market places were pretty innovative. The dealers that used them weren’t. They are the equivalent of people who discovered eBay in the 90s. Early adopters, not innovators.
Plumbers make excellent money, not a "little bit". I don't know about bread factories, but I assume they do well too.
Plumbers and bread factories make good money compared to salaried W-2 employees (even compared to Googlers, sometimes), but this again is a risk/money tradeoff. When you choose to work for a big company, you are trading off the risk that your efforts will be useless vs. a guaranteed payday that lets the company keep all the rewards if they're successful. In software it's trivially easy to make the opposite risk vs. reward tradeoff: just incorporate the company yourself and get acquired, in which case you get nothing if your efforts are unsuccessful but keep the full market value of your product if they are.
> They need to be broken up and repurposed to multiple, actually value-creating companies.
These obviously can't both be true. You need to take your pick of what you critizice.
The real cost of delivering these services is written off by the company as a necessary expense. The value obtained from these services via goodwill or some other metric is currently deemed to be greater than their cost.
Now bigger companies have processes, hierarchies, etc. to manage risk in a distributed way, because well they are bigger. But guess what these companies also have? profits! revenue! multiple products/services that produce that revenue that can be then assigned down at the appropriate level of hierarchy that took/mitigated/managed the original risk.
Google doesn't. It's a single-product company with a single Profit Line and thousands of Loss lines and it's pretending to be something else. That's why they are so busy managing risk all the time; most of them don't have revenues to manage, aim for, use to be rewarded for.
Google is a monopoly, a rentier on the internet. They need to be broken up and repurposed to multiple, actually value-creating companies. If not for the health of the internet, at least for the mental health of its employees it seems.
(I would argue that Google's "free" products, like Android, are the worst thing that has happened to the internet; they cannot be broken up soon enough).