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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: Google passes $300 billion barrier, what next? China sees growth pick-up. Retail sales jump again. Renting is still cheaper than buying for the 95 per cent brigade 


Google approaches $300 billion barrier, what next?

Cast your mind back to the summer of 2012. Analysts were worried about Google. Advertising on mobile phones was less effective than on desk-tops, or so went the received wisdom. And since more and more us are taking to the internet via our mobile phones, analysts feared Google would lose out.

By the middle of the summer, shares in Google were down to almost $550, around $100 dollars off the start of year price. As Apple was winning plaudits, becoming the world’s biggest company, doubts were creeping in about Google.

Results changed all that. By October 2012 Google’s shares were up to $750, and the company saw its market cap overtake Microsoft’s for the first time ever.

Well, that was a year ago.

Yesterday, the company revealed its latest results. Net income was up 36.5 per cent to $2.97 billion, revenue rose to $14.89 billion, up 12 per cent. Just remember, when the company was floated in 2004 its market cap was $23 billion. Many said that was absurd and suggested we were seeing a new dot com bubble. Well, nine years on, its annual profits are on course to be worth more than half of its IPO valuation.

Last night the share price jumped to $960 in aftermarket trading, up 8 per cent in 24 hours, and up some 70 per cent since the summer of 2012, pushing its market cap over the $300 billion level – roughly $150 billion short of the Apple market cap, but leaving Microsoft behind. Before the company announced its results its market cap was slightly higher (in percentage terms) than Microsoft’s.

Why, the big leap? As analysts had anticipated, it is indeed true that so far ads on mobile phones make less money than ads on PCs. Cost per click has fallen for eight quarters in succession and was down 8 per cent in Q3 alone.

But as more and more of us go online using our mobile phone or tablet, the number of clicks have increased – they are up by 26 per cent.

It is not rocket science. There is something very deliberate and almost calculated about sitting at a PC. You don’t accidently use your PC. But for using smart phones, the psychology is completely different. You can see people in trains, or in coffee shops. They sit down, and grab their smart phone and go on the internet. It is as if they are not thinking about it – it’s as automatic as breathing. As if by accident, they are on Facebook.

The ‘X Factor’ is on TV, and one of the very frequent ad breaks comes on. Do you watch the ads? Make a cup of coffee? Go to your PC, sit at your desk, wake the PC up, and call up say Facebook? Or do you press one button on your smart phone, slide the control key and press the Facebook button? It is a one second process. You may well still be seeing ads of course, but on the whole ads on the internet are less intrusive than on TV.

When it comes to the internet smart phones equal more clicks, but perhaps there’s less thought behind the clicks.

But as we take our smart phones with us into shops, to football matches, on trains, while we are going for a walk, and as 3G is replaced by 4G giving us much faster bandwidth just about all the time, we are hit by ads in more ways than was ever previously possible. Add to that the move towards wearable devices. We may be only a year or so away from smart watches that can be used as a way of enhancing the shopping experience for users, and providing retailers with lots of opportunities to hit potential customers with their promotions.

Shops can target us as we walk by their window, for example. Trains might be able to promote the food they sell directly to you via your phone. The commercial implications are massive.

That is why Google remains a very interesting company, and why its potential for growth from advertising is still considerable.

In the long term, its potential is also very interesting because the company is one of the world’s great experimenters – from self-driving cars and Google glasses, to an idea for wind farms flying above the ground like giant kites.

The next big disruptive moment in the story of technology may well prove to be the so-called Internet of Things. Assuming this development does not prove to be all hype, it will make some companies a lot of money, while others will fall by the wayside, in much the same way that Microsoft appears to be doing as we migrate from PCs. Some companies will be victims of innovators’ dilemma, as Kodak was, and Blackberry appears to be. Others will see revenues and profits grow very rapidly.

Intel, ARM, Samsung, IBM, Apple and Google all seem to be in the running for being winners from the Internet of Things. They may not all make it, but as all investors know, the key is diversification – some will.

China sees growth pick-up

The PMIs had told us things were getting better. Now the official data has confirmed it.

China saw GDP rise by 7.8 per cent in Q3, compared with 7.5 per cent in the previous quarter, 7.7 per cent in Q1 and 7.4 per cent in Q3 last year.

If the UK managed that, then the headlines would scream at us. For China, alas it means the economy is not growing like it used to. For the past three decades it has averaged growth of 10 per cent a year.

Not that 7.7 per cent is bad. And if China really can adjust from investment and export led growth to consumer led growth, as its government says it wants to, expect hiccups during the change.

Besides Chinese households might be better served by lower growth, but higher rises in wages, than higher growth leading to higher profits but not necessarily higher wages.

Some are suspicious, mind you. They think it is odd that China’s growth in Q3 was pretty much bang on what the government had targeted. Does that make the government an expert at manipulating the economy or the data?

china_GDP

Retail sales jump again

September was a good month – at least it was for retail sales.

They rose 0.6 per cent month on month, by 1.5 per cent during the three months to September compared to the previous three month period and by 2.2 per cent year on year.

retail_sales

It was a pretty good month all around, but perhaps the most interesting development in September was the rise in household goods, which were up 3 per cent month on month. It appears the revival in the UK housing market is having a knock-on effect.

Martin Beck, UK economist at Capital Economics, focused on two contradictory pressures. Wage growth is still lagging behind inflation, and with recent hikes in gas prices, affordability is not being helped. He suggested that this may mean that growth in retail sales is unlikely to improve by much. He said: “But rising wealth, the pick-up in consumer credit and improving consumer confidence should at least mean that this growth can be sustained.”

Bull:       Chris Williamson at Markit was more bullish. He said: “While there has been a lot of focus on whether the economy is managing to ‘rebalance’ away from consumption, we should remember that the sheer size and importance of the consumer spending in the UK economy means that rising retail sales form an essential part of any economic recovery. Happily, we are also seeing surging growth in construction, manufacturing and services alongside these improving retail sales numbers. These data therefore add to evidence that the economy is set to see strong growth in the third quarter, with GDP rising by 1.0% or more, and that broad-based nature of the upturn means the stage is set for robust growth to persist in coming months.”

Renting is still cheaper than buying for the 95 per cent brigade

Help-to-Buy – three of the most contentious words related to the UK economy today. One point is often overlooked. The government may be helping to make 95 per cent mortgages available, but they are bloomin’ expensive, with mortgages typically around 5 per cent.

Hometrack has looked into it and says: “Our analysis suggests that buying a 2 bed home with a 95 per cent Help-to-Buy mortgage would cost 22 per cent more per month than renting on a national basis. The increase is 31 per cent in higher value markets such as London. Across all regions Help-to-Buy is also around 5 per cent higher than rental values at the top 25% of the market.

hometrack

 

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


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