Remember that Rule #1 investors act as if we own the entire business -- so what does this mean if we like Google and feel like we own the whole thing?
It means the management just decided to take our pie -- which we own all of -- and cut a slice of it out and sell it to someone else. On a per share basis, they just hacked about $20 a share out of my wallet. That kind of sucks, doesn't it?
I've given them the right to do it (somewhere along the line the shareholders approved issuing another 90 million shares of stock for just this sort of possibility, so management doesn't have to ask for permission). But why would I feel good about having 8% of my pie get confiscated and sold to someone else?
The only reason to feel good about this is if my management team is planning on using the $4 billion to grow even faster than I am projecting, thus making up the lost piece in total size of the pie. But if they are going to use the money only to just grow as fast as I am projecting, then the growth rate of the company might be right, but my growth rate per share is going to be way off.
Its a good thing if it means Google is going to grow faster. They might buy somebody (which is good if they get a Rule #1 deal) or they might explode their marketing and take over the world. If the whole pie is going to get bigger than I thought, I don't mind if a piece is missing as long as my chunk is bigger than I expected.
But its a bad thing if it means they need the money to grow as fast as me and the analysts expected they would. In that case, my pie is not going to get bigger and I just got a piece taken away.
Since I sold at $280 and haven't been signaled back in by the big guys, this announcement is making me take another look at whether I want to get back in. I need to re-evaluate my Sticker and MOS Prices.
The big question I have to ask is this: Since I'm already projecting them to grow at 32%, a pretty outrageous number, for a long time, what happens if I reduce that number a bit to account for getting diluted?
So I drop my projection to 29% long term (to account for an 8% dilution). Answer: The Sticker at 32% is $670 but at 29% its $530. MOS at $530 is $265. Google is selling today for $279. Hmmm.... The business is still priced where I can buy it with a lot of room to be wrong ... or diluted.
So I'm still in if the big guys move into the stock again, but hey, my dear Google management: please make this dilution pay off big time with accelerated growth, okay? Or I've got to dump you in favor of more Rule #1-minded businesses.