When Google snatched up former Morgan Stanley finance chief Ruth Porat with a $70 million pay package, a few eyebrows were raised. Since joining the company in May, Porat has proven on a daily basis that Google’s board of executives made a brilliant decision.
On Friday Google’s shares soared by $96.47, or 16%, to $699.20, adding more value — $65 billion — in one day than any company ever has. The company is now valued at $468.3 billion.
While Google showed an increase in mobile search and YouTube revenues, investors were most quick to talk about Porat’s aggressive maneuvers aimed at keeping the company’s costs in check, while pursuing areas of efficient revenue growth.
“She’s in place and she said the right thing, that Google is going to bring more accountability and process to the company,” said BGC Partners analyst Colin Gillis. “That is great.”
Porat addressed investors for the first time as Google’s new finance chief Thursday afternoon during the Internet giant’s quarterly earnings call. Following her statements RBC Capital Markets analyst Mark Mahaney said in his researcher report, “The tone of new CFO Ruth Porat was certainly more cost respectful than predecessors.”
Why Wall Street Is Giving Porat High Praise
As Re/Code‘s Kara Swisher pointed out on CNBC recently, “She is a creature of Wall Street.” Swisher notes that Porat uses all of the right Wall Street terms, such as “transparency” when addressing investors.
A focus on revenue growth with responsible spending? Martin Pykkonen of Rosenblatt Securities recently gave Google a target price of $750 from $600. In his note Pykkonen writes, “Our price target for Google is still based on just about half of the multiple on our price target for Facebook (FB: Buy), which we consider to be fair relative valuations, based on our respective growth estimates for each company […] Google’s new CFO, Ruth Porat made an early strong mark yesterday as she emphasized revenue growth investments still being the main priority for the company, and while not ruled out (and admittedly still early in her tenure) it seems clear that buybacks/dividends and any other short-term capital returns seem to be in the background.
Kleiner Perkins Caufield & Byer partner Mary Meeker went so far as to call Porta “the best banker I have worked with since [Frank] Quattrone”.
Ralph Schackart of William Blair has also reiterated an Outperform rating and a $750 price target. In his address, Schakart also sang the praises of Ruth Porat’s leadership. “Google shares were up 11% after hours as the company’s new CFO, Ruth Porat, addressed a number of investor concerns head-on. For example, Ms. Porat stressed management’s focus on disciplined operating and capital expenditure management several times throughout the call. In addition, she noted that she is focused on maximizing shareholder value over the medium to longer term and seemed open to future capital distributions and enhanced business segment disclosures, in our view […] Despite the uptick, we continue to believe that Google shares should outperform the market going forward. In our view, if the new CFO executes on the tighter governance of expenses related to longer-term projects such as Fiber, Nest, and Google Life Sciences, the resulting operating margin expansion should continue to drive shares higher. In addition, we believe management’s tone indicated that the company plans to be more investor friendly going forward, another positive for the stock.”
Aaron Kessler of Raymond James also gave Google a $720 price point. He claims “The new CFO also noted several times the prioritization of resources as management begins the 2016 budgeting process. YouTube – Watch time accelerated to 60% y/y ( the fastest growth in over two years) with mobile watch time doubling. In addition, YouTube video advertisers grew more than 40% y/y and average spend for top 100 advertisers grew over 60% y/y.”
Even when Ruth Porat is not directly named, her approach to responsible revenue management and growth can be heard in the sentiments of Kerry Rice at Needham & Co., “Expense management appears a key focus, but we believe a return of capital is relatively low.”
CNBC’s Jim Cramer went so far as to give Ruth Porat all of the credit for the company’s recent shift towards becoming an investor friendly firm. Following Ruth Porat’s earnings call Cramer explains, “I said, ‘What company is this? Where were the driverless space engines?’ I never once heard them,” he said. “It sounded like other conference calls of publicly traded companies. At no point did it deviate into some sort of existential Kant versus Marx. … There was no mention of Tolstoy. It frankly was about the numbers.” In other words, Ruth Porat is all about the numbers and that’s what matters in investors.
What Ruth Porat Must Do To Succeed At Google
With the support of Wall Street directly in her corner, Ruth Porat must now act like a Wall Street banker, keeping Google’s shareholders and potential investors directly in her sights.
BUYBACK VERSUS DIVIDENDS AND MANAGING $100+ Billion: With $112 billion in assets and $80 billion cash on hand and $32 billion in EBITDAR or cash flow, Porat will have to show that she can manage that cash while offering significant value to shareholders. As many of the investors above explained, Wall Street is looking for responsible dividend payments and stock buybacks. Porat, with her substantial banking background, will have to show exactly how her decisions in those regards will affect Google and its investors.
THE CREDIBILITY QUESTION: Make no mistake about Google’s reasoning behind Porat’s hiring, the company needs to increase its credibility among Wall Street Bankers. Porat helped lead some of the biggest tech IPOs of all time, including Amazon, eBay, and Priceline Group. She was also a key driver (and potential CEO successor) for Morgan Stanley’s turnaround following the financial meltdown. We know she can use Wall Street terms to drum up support for the tech giant. Now she must prove that she can also drive massive revenue changes at the search giant. As Rosenblatt Securities analyst Martin Pyykkonen said, “We look to her experience most recently in the financial industry and earlier in tech industry banking as a strong hybrid base for effectively deploying Google’s capital going forward and enhancing credibility (with better transparency) with institutional investors.”
TRANSPARENCY: Goldman Sachs went so far as to state Google‘s new CFO should take the bull by the horns by “increasing transparency on YouTube and other parts of the business and making better use of the search leader’s $65 billion cash balance, perhaps with a stock buyback.” A key driver for success in almost every single report following Google’s earning call has been “transparency” at the tech firm.
METRICS MUST MATURE: Goldman Sachs analyst Heather Bellini explains, “As Google matures, the metrics it provides need to mature as well. We categorize Google into four distinct businesses (desktop search, mobile search, display and YouTube) which are each at very different points of their maturity, are experiencing different pricing and click dynamics, and represent different return-on-investment to advertisers.
Bellini continues, “To date, Google has yet to give firm revenue breakouts for YouTube and there have been mixed data points surfacing from news sources. In February, the Wall Street Journal reported that YouTube generated $4 billion in revenue but still was not a profitable business. With the potential for TV ad budgets to begin shifting to online and YouTube’s reach, we believe the asset has strong prospects, yet we still struggle to understand the current state.”
During the earnings call Porat said the company does “not break out profit by product.” If she listens to investors and plays nice with Wall Street, that could change in the very near future.
TRIMMING THE FAT: Google is spending billions of dollars on acquisitions, data centers, marketing and R&D. Operating expenses totaled about $6.4 billion for the quarter, which is down from the first quarter. Porat has been tasked with figuring out where to trim the fat, while at the same time allowing the company to grow in sectors where the largest revenue return is likely. It will be interesting to see if Google scales back on its autonomous vehicles project, which is costing the company billions of dollars, and invests further in other potential game-changers that have already arrived to market such as NEST. If Porat doesn’t find the right revenue balance, it could hurt the company’s attempts to disrupt new industries and secure early market share for new products.
Ruth Porat has quickly become Google’s new darling child and that status looks to be firmly in place. Wall Street bankers love business people who understand their desire for responsible revenue spending and growth, and for the time being, Porat is still viewed as a member of that bankers club, and that’s great news for Google and its investors. Politico lauded her as “the most powerful woman on Wall Street” and for Google investors that is the type of praise that has allowed Google to massively increase its price per share in just a 24 hour period.