Financial Management Term Project

Evaluate Nike and Google

DECEMBER 29, 2019

Group 8
張聚洋,楊佳語,王彥雄,范姜云均
蔡文國,鄭耀鴻,陳瑪衿

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In the class, we have learned the Capital Asset Pricing Model (CAPM); to put it into practice,
we choose Google and Nike two stocks to compare and discuss further. Both of them have
remarkable performance and profound influence on the market respectively.

Q1. 2013/12/31~2018/12/31 Prices Q2. monthly returns

Nike Google Nike Google
Adj
Date Date Adj Close Date Return Date Return
Close
2014/1/1 33.21 2014/1/1 588.28 2014/1/1 2014/1/1
2014/2/1 35.70 2014/2/1 605.56 2014/2/1 7.48% 2014/2/1 2.94%
2014/3/1 33.88 2014/3/1 555.45 2014/3/1 -5.09% 2014/3/1 -8.28%
2014/4/1 33.46 2014/4/1 525.22 2014/4/1 -1.23% 2014/4/1 -5.44%
2014/5/1 35.28 2014/5/1 558.36 2014/5/1 5.43% 2014/5/1 6.31%
2014/6/1 35.80 2014/6/1 573.70 2014/6/1 1.47% 2014/6/1 2.75%
2014/7/1 35.60 2014/7/1 570.03 2014/7/1 -0.54% 2014/7/1 -0.64%
2014/8/1 36.26 2014/8/1 570.03 2014/8/1 1.84% 2014/8/1 0.00%
2014/9/1 41.43 2014/9/1 575.78 2014/9/1 14.25% 2014/9/1 1.01%
2014/10/1 43.18 2014/10/1 557.55 2014/10/1 4.23% 2014/10/1 -3.17%
2014/11/1 46.11 2014/11/1 540.35 2014/11/1 6.80% 2014/11/1 -3.09%
2014/12/1 44.65 2014/12/1 524.96 2014/12/1 -3.16% 2014/12/1 -2.85%
2015/1/1 43.09 2015/1/1 533.06 2015/1/1 -3.50% 2015/1/1 1.54%
2015/2/1 45.36 2015/2/1 556.87 2015/2/1 5.28% 2015/2/1 4.47%
2015/3/1 47.14 2015/3/1 546.50 2015/3/1 3.91% 2015/3/1 -1.86%
2015/4/1 46.44 2015/4/1 537.34 2015/4/1 -1.49% 2015/4/1 -1.68%
2015/5/1 47.77 2015/5/1 532.11 2015/5/1 2.86% 2015/5/1 -0.97%
2015/6/1 51.03 2015/6/1 520.51 2015/6/1 6.83% 2015/6/1 -2.18%
2015/7/1 54.43 2015/7/1 625.61 2015/7/1 6.67% 2015/7/1 20.19%
2015/8/1 52.79 2015/8/1 637.61 2015/8/1 -3.01% 2015/8/1 1.92%
2015/9/1 58.09 2015/9/1 608.42 2015/9/1 10.04% 2015/9/1 -4.58%
2015/10/1 62.21 2015/10/1 710.81 2015/10/1 7.10% 2015/10/1 16.83%
2015/11/1 62.80 2015/11/1 742.60 2015/11/1 0.95% 2015/11/1 4.47%
2015/12/1 59.35 2015/12/1 758.88 2015/12/1 -5.50% 2015/12/1 2.19%
2016/1/1 59.17 2016/1/1 742.95 2016/1/1 -0.30% 2016/1/1 -2.10%
2016/2/1 58.77 2016/2/1 697.77 2016/2/1 -0.68% 2016/2/1 -6.08%
2016/3/1 58.65 2016/3/1 744.95 2016/3/1 -0.19% 2016/3/1 6.76%
2016/4/1 56.38 2016/4/1 693.01 2016/4/1 -3.87% 2016/4/1 -6.97%
2016/5/1 52.83 2016/5/1 735.72 2016/5/1 -6.31% 2016/5/1 6.16%
2016/6/1 52.81 2016/6/1 692.10 2016/6/1 -0.04% 2016/6/1 -5.93%
2016/7/1 53.25 2016/7/1 768.79 2016/7/1 0.84% 2016/7/1 11.08%
2016/8/1 55.30 2016/8/1 767.05 2016/8/1 3.86% 2016/8/1 -0.23%
2016/9/1 50.51 2016/9/1 777.29 2016/9/1 -8.66% 2016/9/1 1.33%
2016/10/1 48.28 2016/10/1 784.54 2016/10/1 -4.43% 2016/10/1 0.93%

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 2016/11/1 48.17 2016/11/1 758.04 2016/11/1 -0.22% 2016/11/1 -3.38%
2016/12/1 49.76 2016/12/1 771.82 2016/12/1 3.30% 2016/12/1 1.82%
2017/1/1 51.08 2017/1/1 796.79 2017/1/1 2.65% 2017/1/1 3.24%
2017/2/1 55.19 2017/2/1 823.21 2017/2/1 8.05% 2017/2/1 3.32%
2017/3/1 53.81 2017/3/1 829.56 2017/3/1 -2.50% 2017/3/1 0.77%
2017/4/1 53.67 2017/4/1 905.96 2017/4/1 -0.26% 2017/4/1 9.21%
2017/5/1 51.33 2017/5/1 964.86 2017/5/1 -4.37% 2017/5/1 6.50%
2017/6/1 57.15 2017/6/1 908.73 2017/6/1 11.34% 2017/6/1 -5.82%
2017/7/1 57.39 2017/7/1 930.50 2017/7/1 0.43% 2017/7/1 2.40%
2017/8/1 51.33 2017/8/1 939.33 2017/8/1 -10.57% 2017/8/1 0.95%
2017/9/1 50.57 2017/9/1 959.11 2017/9/1 -1.48% 2017/9/1 2.11%
2017/10/1 53.63 2017/10/1 1016.64 2017/10/1 6.06% 2017/10/1 6.00%
2017/11/1 58.92 2017/11/1 1021.41 2017/11/1 9.87% 2017/11/1 0.47%
2017/12/1 61.00 2017/12/1 1046.40 2017/12/1 3.53% 2017/12/1 2.45%
2018/1/1 66.75 2018/1/1 1169.94 2018/1/1 9.43% 2018/1/1 11.81%
2018/2/1 65.59 2018/2/1 1104.73 2018/2/1 -1.74% 2018/2/1 -5.57%
2018/3/1 65.01 2018/3/1 1031.79 2018/3/1 -0.88% 2018/3/1 -6.60%
2018/4/1 67.12 2018/4/1 1017.33 2018/4/1 3.25% 2018/4/1 -1.40%
2018/5/1 70.47 2018/5/1 1084.99 2018/5/1 4.99% 2018/5/1 6.65%
2018/6/1 78.20 2018/6/1 1115.65 2018/6/1 10.97% 2018/6/1 2.83%
2018/7/1 75.69 2018/7/1 1217.26 2018/7/1 -3.21% 2018/7/1 9.11%
2018/8/1 80.90 2018/8/1 1218.19 2018/8/1 6.88% 2018/8/1 0.08%
2018/9/1 83.58 2018/9/1 1193.47 2018/9/1 3.32% 2018/9/1 -2.03%
2018/10/1 74.03 2018/10/1 1076.77 2018/10/1 -11.43% 2018/10/1 -9.78%
2018/11/1 74.11 2018/11/1 1094.43 2018/11/1 0.11% 2018/11/1 1.64%
2018/12/1 73.36 2018/12/1 1035.61 2018/12/1 -1.01% 2018/12/1 -5.37%
2019/1/1 81.02 2019/1/1 1116.37 2019/1/1 10.44% 2019/1/1 7.80%

Q3& Q4. the average returns, standard deviations and correlation coefficient of the stocks
Standard
Nike Google return
deviation
0 1 5.77% 1.23%
0.05 0.95 5.75% 1.25%
0.1 0.9 5.74% 1.27%
0.15 0.85 5.72% 1.30%
0.2 0.8 5.71% 1.32%
0.25 0.75 5.69% 1.34%
0.3 0.7 5.68% 1.36%
0.35 0.65 5.67% 1.38%
0.4 0.6 5.65% 1.40%
0.45 0.55 5.64% 1.42%

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 0.5 0.5 5.62% 1.44%
0.55 0.45 5.61% 1.46%
0.6 0.4 5.59% 1.48%
0.65 0.35 5.58% 1.50%
0.7 0.3 5.57% 1.52%
0.75 0.25 5.55% 1.54%
0.8 0.2 5.54% 1.56%
0.85 0.15 5.52% 1.58%
0.9 0.1 5.51% 1.60%
0.95 0.05 5.49% 1.63%
1 0 5.48% 1.65%

Nike Google
Average Return Average Return
1.65% 1.23%
Standard
Standard Deviation
Deviation
5.48% 5.77%
correlation
25.41%

Q5. Interpret the graph

Portfolio
NKE GOOG VAR STDEV AVE
Variance covariance matrix
0% 100% 0.33% 5.77% 1.23%
NKE GOOG 5% 95% 0.31% 5.55% 1.25%
NKE 0.003004 0.000803 10% 90% 0.29% 5.36% 1.27%
GOOG 0.000803 0.003325 15% 85% 0.27% 5.17% 1.30%
20% 80% 0.25% 5.01% 1.32%
25% 75% 0.24% 4.86% 1.34%
30% 70% 0.22% 4.73% 1.36%
35% 65% 0.21% 4.62% 1.38%
40% 60% 0.21% 4.54% 1.40%
45% 55% 0.20% 4.49% 1.42%
50% 50% 0.20% 4.45% 1.44%
55% 45% 0.20% 4.45% 1.46%
60% 40% 0.20% 4.47% 1.48%
65% 35% 0.20% 4.52% 1.50%
70% 30% 0.21% 4.59% 1.52%
75% 25% 0.22% 4.69% 1.54%
80% 20% 0.23% 4.81% 1.56%

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 85% 15% 0.24% 4.95% 1.58%
90% 10% 0.26% 5.11% 1.60%
95% 5% 0.28% 5.29% 1.63%
100% 0% 0.30% 5.48% 1.65%

The graph shows gains of diversification of investing Nike and Google. We know that high risk may
has high return, but we can invest diversely to avoid high loss but also gains benefits. From the
graph above, we can see that it has an efficient portfolio frontier, which is green line. The portfolio
point which is more tend to west-north side, is more possibly efficient. On the other side, the blue
line is inefficient portfolio frontier, investor may put in more money but gains a little. As long as
correlation unequal to one, there are always gains of diversification.

Q6. betas of the stocks

Cov(Rn,Rm) Cov(Rg,Rm) Var(Rm)
0.07% 0.11% 0.11%
Beta(GOOG) Beta(NKE)
103.69% 65.30%

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Q7. Calculate the Dec. 2018 CAPM expected returns for the stocks and compare them with the
actual Dec. 2018 returns.
Cov(Rn,Rm) Cov(Rg,Rm) Var(Rm)
0.07% 0.11% 0.11%

Beta(GOOG) Beta(NKE)
103.69% 65.30%

-9.52% -5.96%

2018Dec expected
CAPM 2018Dec actual return
return
GOOG 8.15% 7.80%
Nike 5.17% 10.44%

The expected return is different from actual return since the assumption condition of CAPM is
different from the actual condition. And here are some reasons:
1. Condition Asymmetry
(a) The competitive market: But the real condition is that we have transaction cost, information cost
and tax, which belongs to imperfect market.
(b) Investors have homogeneous expectations: But the real condition is that the investors are all
non-homogeneous, which makes a dot on security market line becomes an interval and that's
reason why it didn't outfit with the expected return.
(c) investors all have efficient portfolio of traded securities: But the real condition is that the investors
are not all homogeneous.
To sum up those three elements, we cannot count the real beta but a theorical one.
2. Beta is only just a single way to predict the risk of market. Based on CAPM, the individual risk has
been eliminated because of diversification, but the problem is that we found that risk-free interest
would be different according to every enterprises’ attribute or environment or different scenario. So
we reckon that risk-free rate may have a implied variation. "

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Q8. Should these articles affect stock prices
1.Colin Kaepernick becomes the face of Nike's Just Do It campaign
(source: The Guardian, https://www.theguardian.com/sport/2018/sep/03/colin-kaepernick-nike-
just-do-it-campaign-nfl ,2018/09/03)

Colin Kaepernick, the former San Francisco 49ers quarterback who sparked controversy by kneeling
during the national anthem to protest racial injustice, will be the face of a Nike advertising campaign
for the 30th anniversary of its “Just Do It” motto.

Kaepernick was a quarterback in the NFL for six years. He stirred national debate by taking a knee
while the anthem was played before games during the 2016 season, to draw attention to police
killings of African Americans and other issues.

Kaepernick tweeted a black-and-white photo of himself on Monday featuring the Nike logo and
“just do it” slogan as well as a quote: “Believe in something. Even if it means sacrificing everything.”

Nike has endorsed Kaepernick since 2011 but has not featured him in campaigns since his departure
from the NFL.

“We believe Colin is one of the most inspirational athletes of this generation, who has leveraged the
power of sport to help move the world forward,” the Nike executive Gino Fisanotti told ESPN. “We
wanted to energize its meaning and introduce ‘Just Do It’ to a new generation of athletes.”

The protests during the national anthem, soon embraced by other players, raised the ire of some
NFL fans, Republican politicians and President Donald Trump.

Trump said the players disrespected the American flag and the military, and has said he would love
to see NFL owners fire such players.

Kaepernick and another former 49ers player, Eric Reid, have not been signed by any of the NFL’s 32
teams since their protests spread. Both have filed collusion grievances against NFL owners.

On Thursday, arbitrator Stephen Burbank denied the league’s request to dismiss the case, which
means he found sufficient evidence for the case to continue and perhaps go to trial.

News of Nike’s ad campaign broke just days before the first game of the NFL season on Thursday,
when the controversy over pre-game protests could flare anew.

Serena Williams was among those who praised the ad, and earlier lauded Kaepernick and Reid. “I
think every athlete, every human, and definitely every African-American should be completely

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grateful and honored how Colin and Eric are doing so much more for the greater good,” she said at
the weekend.

However, it also drew criticism from some quarters, including the former Arkansas governor Mike
Huckabee.

Others on social media posted videos of Nike shoes burning and Nike socks with the “swoosh”
symbol cut out.

Kaepernick received an enthusiastic welcome from fans at the US Open’s showcase match between
Serena and Venus Williams in New York on Friday night, when he was shown raising his fist on the
big screen. “Especially proud to be a part of the Nike family today,” tweeted the former after news of
Kaepernick’s deal emerged.

Comment
From the news, we can notice Nike chose a controversial person to be their annual advertising star.
So what Kaepernick did in the NFL's court? He refused to stand during the national anthem Friday
because of his views on the country’s treatment of racial minorities.

For some conservative people, like President Trump, they may detest such a disrespectful behavior,
therefore, it is undoubted that they are reluctant to see NIKE chose him as an advertising star.
However, for some sporting star, they just advocated this athlete’s freedom of speech.

The question is: what was the Investor's attitude toward this event? In essence, middle class
occupied a dominant number in investors, additionally, their wealth usually had a high correlation
with their political inclination. That was to say, they were located in the right wing of political
spectrum. Hence, we can infer Investor would be more pessimistic to NIKE's advertising policy , and
it would reflect in stock price quickly.

In reality, from 9/1 to 10/1, NIKE's stock price had slumped from 84.72 to 75.12.

2. Google parent Alphabet reports soaring ad revenue, despite YouTube backlash

(source: The Washington Post, https://www.washingtonpost.com/news/the-
switch/wp/2018/02/01/google-parent-alphabet-reports-soaring-ad-revenue-despite-youtube-
backlash/ ,2018/02/01)
Google's ad business continued to soar in the fourth quarter, weathering a crisis of trust in its
growing YouTube video platform.

Google parent company Alphabet's operating profits grew by 15 percent, or about $7.7 billion.
Revenue climbed to an all-time high of $32 billion from $26 billion last year, beating analyst

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estimates. But Alphabet's earnings per share came in under expectations, at $9.70, and the tech
giant took an $11 billion tax provision, sending its stock down in after-market trading.

Ruth Porat, chief financial officer of Alphabet, said mobile search led Alphabet’s strong growth. The
company also enjoyed boosts from desktop search and YouTube, she said. Revenue from Google's
ad business grew by 21 percent from last year and accounts for 84 percent of Alphabet's total
revenue. Alphabet's expansion beyond Internet search is beginning to pay off: its cloud platform,
which competes with Amazon and Microsoft, now generates $1 billion in revenue per quarter.

But tech suddenly appears less invincible to storms that could rock the industry. Google, Facebook
and Apple have all faced scrutiny in recent months of their power and influence on society.

At Google, YouTube has borne the brunt of the backlash — from advertisers, content creators,
parents and users who say that the site fails to effectively enforce its rules banning disturbing and
offensive content, which is consumed by millions, sometimes without human review.

Google chief executive Sundar Pichai signaled that YouTube is responding to the outcry. "In addition
to the significant work we are doing to protect users and stop abuse on the platform, just a few
weeks ago we announced changes to advertising on YouTube." Those changes include stricter
criteria for what types of videos can receive ad dollars, and more manual reviews of content. He
defended YouTube's popularity, saying that 1.6 billion people watch videos on it every month.

Google's recent YouTube troubles have not loosened its grip on online advertising. According to
eMarketer, Google is expected to command 42 percent of U.S. market share for digital ads this year;
Facebook, its closest competitor, is expected to claim 23 percent.

Analysts have also pointed to Alphabet's strengths beyond advertising. In a note to investors earlier
this month, Eric Sheridan, an analyst with UBS, said that the company is well positioned for
developments in key areas of tech, including mobile, machine learning and cloud computing.

Risks to Google's bottom line may come in the form of increased regulation in Europe and in
Washington. RBC Capital Markets, in a research note earlier this week, said leading Internet
platforms appear under a rising threat of government intervention, citing a massive European Union
antitrust fine against Google, a sweeping new data privacy law that will take effect there in May, and
the U.S. government's investigation into foreign interference in the 2016 presidential election.

Last summer, the European Union's antitrust chief hit Google with a record $2.7 billion fine for
illegally steering users toward its comparison shopping site — the largest fine the E.U. has ever
levied against a company for abusing its dominant market position. Pichai told investors on the call
that Google has long had "constructive conversations" with the E.U. and is "understanding their
concerns and responding with thoughtful changes."

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Comment
If we just looked at Google's financial statement to measure its' performance, we may easily put
large amount of money to invest it. However, if we perused this news, some important messages
were hidden in the article. For example, owing to the fact that Google served as a leading Internet
platform in 2016 presidential election, the authorities concerned began to investigate it, so it could
add some uncertainty to its' future.

Furthermore, Google paid record-breaking fine in E.U. because it violated antitrust law. Therefore,
we can conclude that the rapid expansion of google would be limited to some degree. Lastly, the
outcry of Youtube's user may be another potential threat to whole company's goodwill.

As mentioned- above , investors should not be over-optimistic toward Google's stock price. The real
date also proved that Google 's stock fell from 1104 to 1031 during the month.

Q9. evaluate these two firms based on news and recommend one
To begin with, we compare Nike with Google, based on their sales revenue, gross profit, EBITDA,
ROE, ROA, and cash flow from operating activities. And in order to make their difference clear, we
present it in the following table .
(Notice: source is from https://www.macrotrends.net , based on the 2018 Q4 data. Higher number is
highlighted in red.)

From this table, we can notice that Google indeed perform better than Nike in most index. However,
it seems arbitrary that we directly compare different industries of companies into a basket. The more
adequate method is to compare them with similar industry to know the exact profitability they
create.

For Nike, we choose Adidas and Under Armour as target companies, which are competing with Nike
in the sporting industry. As for Google, we choose Apple and Microsoft, both are high-tech giants
like Google is. Here we also use tables to present.
(Notice: source is from https://www.macrotrends.net , based on the 2018 Q4 data. Higher number is
highlighted in red.)

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From these tables, we can find that high-tech industry has a higher number of
index than sporting industry. Nevertheless, high-tech industry is a fast-changing industry, that is to
say, if a company cannot issue the state-of-the-arts products to cater customers continually and
successfully, it may incur a huge loss and disappear in the market soon. Therefore, we cannot expect
these companies ' profitability would be stable. Conversely, the sporting industry is less volatile than
high-tech industry. Because this industry runs business regarding to necessities, they neither have a
skyrocketing rise nor a huge decline.

Additionally, from the News in Question8, we can comprehend that many counties expressed their
concern to the development of these high-tech companies. In fact, authorities concerned began to
enact law to regulate these companies, therefore, their future would be limited. What' s more, high-
tech industry may be involved in some sensitive issues, such as National security, sovereign
intervention and so forth, which makes this industry's future more capricious.

Finally, when we have to evaluate Nike and Google's performance respectively , we consider that
Nike has found its' competence niche in the market than Google. The reason is that we can discover
it performed better than similar companies in the most index from the table. In contrast, Google
cannot surpass its' competitors in the most aspects, which implies that Google is not the best choice
when we need to choose one stock to invest. Therefore, we think if Nike can switch their
commercial policy promptly and run business in a firm way, it would be worthy to invest.

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