How Greater Transparency Adds Market Value to Tech Companies

In an era of big data, providing more information adds value because better understanding leads to more certain outcomes.

This is contrary to the traditional business belief that cards should be played close to the vest but makes perfect sense in a knowledge-driven economy.  JL

Alistair Barr reports in the Wall Street Journal:

Put a value on this new transparency: an extra glimpse inside Alphabet's main profit engine has added $24 billion to the company's value, or more than twice the value of Twitter Inc.There is precedent for this. In the past 1 1/2 years, Amazon.com Inc., Netflix Inc. and Expedia Inc. disclosed more information about different parts of their businesses. Shares of all three rose.
Google reports its latest financial results, with new details that may prompt some to see the company in a different light.
For the parent company, Wall Street expects fourth-quarter revenue of $21 billion and earnings per share of $8.09, according to Thomson Reuters data. But analysts and investors are more interested in the segment details.
With added spending on its new projects, Alphabet's profit margins have been shrinking in recent years. Profit margin excluding interest and taxes fell to 26.2% in 2015, from 30.6% in 2007, according to Michael Nathanson, an analyst at MoffettNathanson Research.
But Mr. Nathanson expects the new numbers to show the core Google unit with a 31.5% profit margin last year -- higher than the 2007 figure.
The analyst estimates the core Google unit made $32 billion in earnings before interest, tax, depreciation and amortization last year. The other units, which Alphabet calls "Other Bets," lost $2.3 billion, he projects.
"Google should get more profitable with each new dollar of revenue, but we haven't seen that in recent years because Google has been investing in all these new businesses, and that's dragged overall profitability lower," Mr. Nathanson said. "If the new numbers reveal this underlying leverage in Google's main business, that's bullish."
The analyst has put a value on this new transparency. Based on a clearer view of higher profit in Google's core, he estimated in December the company was worth $582.5 billion, or $840 a share. That is up from a previous valuation of $ 558.5 billion, or $805 a share. Alphabet shares closed Friday at $761.35, up $13.05.
Put another way, an extra glimpse inside Alphabet's main profit engine has added $24 billion to the company's value, or more than twice the value of Twitter Inc., in the eyes of one analyst.
There is precedent for this. In the past 1 1/2 years, Amazon.com Inc., Netflix Inc. and Expedia Inc. disclosed more information about different parts of their businesses. Shares of all three rose.
Amazon's new numbers revealed a cloud-computing business that was a lot more profitable than investors thought. Expedia broke out losses from a Chinese business called eLong, giving investors a better view of the profits of its main business.
Mark Mahaney, an analyst at RBC Capital Markets, expects Alphabet's new disclosures to follow the Expedia pattern.
"Core Google is more profitable than Alphabet as a whole. The question is by how much and whether the core is getting more profitable," he said. "We want to see leverage there."
Alphabet shares may already have received a boost. They are up more than 13% since Oct. 22, when the company said it planned to report more detailed results. The Nasdaq Composite Index is down almost 5% in the same period.
Then, there is this irony: Profit margins of the main Google business may be dented by heavy investments in cloud computing, to keep pace with Amazon, said Neil Doshi, an analyst at Mizuho Securities USA.