Google (GOOGL 10.22%) without a doubt is an astounding company that has changed all of our lives. Research that was impossible, or at least incredibly costly in time and money, is now possible, and at fractions of both. Outsiders probably know only a handful of things that Google is going to dazzle us with. From Google Fiber today, to self-driven cars and cyborg glasses ahead, Google brainiacs will unleash innovation after innovation, without a doubt.
But, as with any public company, it's a stock, too. Any choice to buy, sell, or hold requires scrutinizing earnings quality indicators that, if low quality, are good predictors of poor stock performance ahead. Days sales outstanding, or DSOs, which is the time it takes revenues to turn into cash in the bank, are job one in earnings quality analysis. And Google's year-over-year quarterly increase in its DSO for seven of the last eight quarters raises eyebrows.
(Disclosure: My co-author John Del Vecchio and I were Authors@Google, and I intend no ungratefulness here to our most generous hosts. But I know that my Google friends expect no less than callin' 'em as I see 'em.)
How long to get paid?
Days sales outstanding is calculated for our quarterly analysis as (accounts receivables/revenues) * days in the quarter.
Examine DSOs in two ways. First, look at DSOs year over year to correct for seasonal variations in a business. And then, to smooth it out to capture trends more accurately, take the LTM (last 12 months) average per quarter. If the latter increases consistently each quarter, there could be trouble for the stock, regardless of the overall market's broad race to the sky that we've seen for the past four years. Look at eight quarters of LTM to perceive the trend over more time. And quarterly year-over-year comparisons can show poor trends that may show up in LTM numbers.
The following table examines year-over-year quarterly DSOs, and then the more important sequential change in LTM DSOs at four companies competing with each other fiercely in many areas: Google (GOOGL 10.22%), Apple (AAPL -0.35%), Microsoft (MSFT 1.82%), and Yahoo! (NASDAQ: YHOO). There's clearly a big fifth in Facebook, but we lack enough data for anything meaningful on DSOs so far.
Company and Calendar Quarter |
Q4 2012 |
Q3 2012 |
Q2 2012 |
Q1 2012 |
---|---|---|---|---|
Google: Quarterly DSOs |
48 |
46 |
45 |
45 |
Year-Over-Year |
+4 |
+3 |
+1 |
+1 |
LTM DSO Avg |
46 |
45 |
44 |
44 |
Seq. LTM Change |
+1 |
+1 |
0 |
0 |
Yahoo ! Quarterly DSOs |
67 |
76 |
74 |
74 |
Year-Over-Year |
+1 |
+7 |
+4 |
+1 |
LTM DSO Avg |
73 |
73 |
71 |
70 |
Seq. TLM Change |
0 |
+2 |
+1 |
0 |
Microsoft : Quarterly DSOs |
52 |
74 |
67 |
64 |
Year-Over-Year |
0 |
+7 |
+1 |
+1 |
LTM DSO Avg |
64 |
64 |
63 |
62 |
Seq. LTM Change |
0 |
+1 |
+1 |
0 |
Apple : Quarterly DSOs |
19 |
24 |
19 |
19 |
Year-Over-Year |
+4 |
+6 |
0 |
(3) |
LTM DSO Avg |
20 |
19 |
18 |
18 |
Seq. LTM Change |
+1 |
+1 |
0 |
(1) |
Company and Calendar Quarter |
Q4 2011 |
Q3 2011 |
Q2 2011 |
Q1 2011 |
---|---|---|---|---|
Google: Quarterly DSOs |
44 |
43 |
44 |
44 |
Year-Over-Year |
+1 |
(1) |
+1 |
+3 |
LTM DSO Avg |
44 |
44 |
44 |
43 |
Seq. LTM Change |
0 |
0 |
+1 |
+1 |
Yahoo! Quarterly DSOs |
66 |
69 |
70 |
73 |
Year-Over-Year |
+7 |
+16 |
+18 |
+19 |
LTM DSO Avg |
70 |
68 |
64 |
59 |
Seq. LTM Change |
+2 |
+4 |
+5 |
+5 |
Microsoft: Quarterly DSOs |
52 |
67 |
66 |
63 |
Year-Over-Year |
0 |
+2 |
+3 |
0 |
LTM DSO Avg |
62 |
62 |
61 |
60 |
Seq. LTM Change |
0 |
+1 |
+1 |
0 |
Apple: Quarterly DSOs |
15 |
18 |
19 |
22 |
Year-Over-Year |
(5) |
(2) |
+1 |
+2 |
LTM DSO Avg |
19 |
20 |
20 |
20 |
Seq. LTM Change |
(1) |
0 |
0 |
0 |
Yahoo's LTM DSOs have been steadily improving. This has corresponded with a rising stock price; but whatever turnaround may be happening, it doesn't change the fact that the stock is absurdly priced by the market at 11 times EV to LTM EBITDA and, gulp, 30 -- yes, thirty! -- times market cap to LTM-levered free cash flow! Steer clear.
Microsoft's steady year-over-year increases don't look as significant when smoothed through the LTM average. Microsoft is cheap at seven times EV to LTM EBITDA, and 11 times market cap to levered free cash flow, but we'll next see that Apple is cheaper. Which company would you bet on for any multiple expansion (where the market will pay a higher multiple of EBITDA or free cash flow for the business value)?
Apple's calendar third-quarter numbers released on Oct. 25, 2012 revealed a huge year-over-year 10 DSO spike, followed by two more days in the fourth quarter. The stock had fallen to $605 by the Oct. 25 release, but still had another 28% to go to yesterday's $434 close. So far, however, the LTM changes are immaterial, so we won't know where the trend is for another quarter or two. Plus, Apple is subject to margin compression and product cycles, which are likely far more important to the stock drop to date. And it's cheap, cheap, cheap -- six times EV to LTM EBITDA, and 12 times market cap to LTM levered free cash flow, though, of course, that includes two better and two worse quarters. It's getting close to value land. Who woulda thunk it?
And then there's Google.
Googling Google
While Google's LTM DSOs have risen immaterially, there are warning jumps for seven of the last eight quarters year over year. The trend will start to show up in LTM numbers unless there's a significant reversal of the last three quarters' direction. This is a sign for investors to be on guard for potential downside from today's price. Google sells for 13 times EV to LTM EBITDA, and 24 times market cap to LTM levered free cash flow, which is pretty high. For a growth investor, it depends on forecasting the growth; but you don't get paid as with Microsoft and Apple's dividends and buybacks. Google is worth only whatever anyone says it is. Curmudgeonly Investors like me trust management to invest capital for higher return, but we like the bird in hand of getting paid along the way.
Shareholders are well advised to watch the stock. The red flag is hardly waving madly from the highest point at the Mountain View, California Googleplex, but when DSOs are up year over year for seven of the last eight quarters, the customers are taking longer to pay. Never a good thing.