Friday, January 22, 2010

Google The Cash Machine

(High class problems for Google.)

Cash, not China, is Google’s biggest conundrum. More precisely, where should the search giant point its gusher of greenbacks? The online advertising market recovery and increasing efficiency pushed free cash flow up 44 percent, to $2.5 billion in the fourth quarter. Adding that to the company’s $24 billion cash hoard doesn’t make sense. But giving it to shareholders does

Google’s warning that it may shut down its operations in China in response to online attacks on its business has gained all the attention over the last few weeks. While investors might fear the potential impact of pulling out of one of the fastest-growing search markets, in reality Google’s problem in China is relatively small potatoes compared with the challenge of spending its money wisely.

The company, led by Eric Schmidt, the chief executive, says it will invest heavily. Fair enough — revenue increased 17 percent in the fourth quarter from a year earlier, and such growth calls for some extra capacity. But adding capacity won’t take that much cash. Capital expenditure was just $289 million in the quarter and even spending twice as much every three months, as Google did in 2007 and 2008, would hardly make a dent in the company’s bank balance.

Of course, Google also sees lots of potential business opportunities it can justify spending money on. Cellular data traffic is going through the roof, and the mobile search market will boom as more consumers buy smartphones. Online software services and social networks are two other high-growth areas rightly highlighted by Google.

Yet even these initiatives are inadequate to answer the question of what Google should do with its cash. It is already pursuing them. But free cash flow is still rising. It can buy other companies, but Google’s largest acquisition so far was YouTube for $1.7 billion, and that was in stock. So it is unlikely the company can find enough good candidates to justify holding on to so much cash for acquisitions. Handing a chunk of it to shareholders, through dividends or buybacks, is overdue.