Tech Investing Insights

Google: Invest in it now?

Now that Google has achieved another blowout quarter with outstanding growth in revenues and profits, the technology company's stock price is now above $700 per share.  Some Wall Street analysts are projecting the company's stock price to go to $1000 per share.  Many investors are wondering if Google is still a good buy; or if they own the stock, should they sell, take the profits and look to invest elsewhere.

Let's discuss the the realities of Google's situation.

In North America, Google has the lion's share of the search and advertising business, around 55%.  Yahoo! is a distant second with market share in the lower twenties, and the monster in Redmond, Mighty Microsoft, really distant.  Yahoo is struggling to even devise a recovery strategy since the former CEO, Terry Semel, resigned.  Yahoo's new search engine has yet to see great results, and the company's growth is small.  It's no surprise that the share price has been stagnant.  Microsoft acts as if nothing is wrong.  They seem to have a "wait and see" plan, while boasting about Windows Vista and XP revenues, along with good growth from sales of their office products.

In my view, no one in North America can catch Google.  Google must own nearly a thousand server farms by now, and they keep building more.  "Server farms" refer to the storage complexes that hold immense amounts data that a search engine sifts through in response to inquiries.  Google owns more of these storage complexes than Yahoo and Microsoft combined.  And talk about a brand name.  The phrase "Google it" has come to mean "Look it up on the Internet," regardless of the search engine that might be used!

Google is now moving into the market of mobile search and advertising.  They are having discussions with Verizon about the Google cell phone, implemented with their own operating system.  As a software company, Google will obviously not build the device but certainly has ideas as to what features to include.  The phone will utilize speedier networks provided by several carriers.  Anything that needs to be downloaded, such as a movie, will do so in faster fashion than, say the Apple iPhone.  Apple blundered when they accepted AT&T's slower second-generation network.  Many carriers, including Verizon, have built out the third generation Internet network, which is much faster.  The result: Google will soon be into cell phone advertising, creating more ad dollars and even fatter profits.

One knock against Google is the huge amount of revenue derived from only one source: advertising.  So what, as long they continue to be king of that hill?

Don't worry about market dips or corrections.  When these things happen, Google and other solid companies will drop somewhat, and then recover as the market recovers.

An issue that Google investors MUST live with is the trend for investors and analysts to set higher and higher standards for growth of revenues and profits.  These are guesses.  The time will come when Google has an outstanding quarter that either just meets the revenue/profit guess or misses the numbers by a minimal amount.  As in the past, if that happens, Google stock will quickly drop by a significant amount.  Because of this, the stock should still be classed as volatile and remain in the aggressive section of an investor's portfolio.

The real competitive threat to Google is Baidu, the Google equivalent in China. Baidu has about 55% market share in China, where Google has 22%.  And Baidu has just entered the Japanese market, with other Asian countries to follow. To date, Google shares with other American companies the same cultural and regulatory difficulties in entering the Chinese market.  The Chinese government always favors its own companies at the expense of foreign corporations.  The same thing occurs when American companies try to enter Japanese markets.  As the world's investing population sees the growth of Baidu's revenue and profits, possibly surpassing those of Google, the Google stock price growth will probably slow down.

Google has an excellent management team and a cadre of smart engineers always looking to develop new and exciting products. They are not bound by a legacy product history.

My conclusion:  Invest in Google, realizing the pitfalls of missing an exaggerated revenues/profit forecast, considering that the stock price can be volatile and maintaining an amount of Google stock in your portfolio commensurate with your risk tolerance.  And keep an eye on Baidu.

Bill Durrenberger is an award-winning public speaker who is available for speeches or presentations on companies and technologies.  He will also be happy to research and provide a written custom evaluation report on a specific company or a technology by request.

Copyright by Bill Durrenberger   November 4, 2007  All rights reserved. Disclaimer: The statements and information presented in this article reflect the opinions of the author and do not constitute a recommendation to buy or sell specific securities.

 

 

Google: To buy or not to buy

People frequently ask me, “Should I buy Google?” My short answer is: "Yes, if you can endure the price volatility, lose money, and still sleep soundly at night.”

Why the caution? After all, Google is way ahead of competition, is it not? Google, the company, has risen from its IPO opening of $86 to around $530 at this writing. Revenues and profits are at a phenomenal level, growth rates of each are at record breaking levels, and many analysts are predicting the stock to go to $600-$650 in the relatively short term. One analyst has even predicted a $1000 stock price. Google's U.S. market share is around 55%, depending on which rating service is quoted, with Yahoo! in second at 20% and Microsoft trailing at 10%. Sound good? Read on.

Here are my reasons for caution:

In 2006, the stock price was at the $420 level when a high level company executive was asked if Google would be able to keep up these sterling results indefinitely. Indefinitely...that means as far as the eye can see! The obvious answer, and the only answer that could be given to such an open-ended question was no. The stock dropped from $420 to around $380 almost overnight, which translates into tremendous volatility for Google—and lost money for those who bought the stock at $400 or more. In December 2006, the stock price was a little over $500. In March, 2007, a mere three months later, the stock price was around $440. Through all this time of yo-yo values, the company was reporting stellar results and growth in both revenues and profits.

• What type of technology company is Google?

In actuality, Google is a software company that has developed a search engine. A search engine is nothing more than software designed to search and discover specific data upon request. The software market has no barriers to entry by other entrepreneurs. All that is needed to begin development of a search engine are three things: First, a personal computer, which most of us have: Then a set of software development tools readily purchased from Microsoft for a few hundred dollars, and a better idea. Don’t forget that Google was developed by two Stanford graduates, as was Yahoo! Virtually anyone can enter the search market with very little initial capital investment. And the search market is huge, which means that many are drawn to come up with a better idea for a more efficient search engine.

• Google's business model

Google derives its revenues from Internet advertising. Profits based on ad revenues represent by far the bulk of Google’s financial success. When a word or phrase is typed into the Google system, the Google search software searches its stored data and comes up with viable results, displaying them to the user or searcher. Along with the search results, Google displays advertisements that are tailored to match the search subject. The entire process costs the searcher nothing. Google earns its ad revenue by charging its advertisers a fee based on the number a times searchers click on an ad. No manufacturing plant needs to be built, no products have to be assembled, and no shipping costs are necessary. Google is offering targeted advertising, which is more effective than the mass advertising you see in the Sunday morning newspaper or the junk mail that comes in the mail. A software service such as this is immensely profitable.

• Google’s competition

With such a hugely profitable market available, with untold riches to be had, several existing competitors and a hundred more are gunning for Google in California's Silicon Valley, China, India, and other places around the globe.

Yahoo! is the number two competitor, with the 800-pound gorilla, Microsoft, as number three. Ask.com, previously known as Ask Jeeves.com, is a distant forth. Ask.com has a more effective search engine, and Yahoo! has yet to see revenue results from their recently released and upgraded search engine called Panama. Microsoft, the largest software company in the world, is lurking somewhere in the shadows and exhibiting its usual lethargy when it comes to initiatives concerning the Internet. With $30 billion or so in cash and thousands of bright software designers, Microsoft could certainly challenge Google by creating a highly competitive search engine. And then there is Baidu, the Chinese equivalent to Google. Baidu has around 2-3 % market share in the United States but an impressive 52-55% of the share in China and Japan. If you believe that we are in a global marketplace, Baidu could very well become a large global competitor to Google. Keep in mind that Google has had trouble getting into the Chinese market.

• Google's issues

Google is spending large amounts of R&D dollars to continue to build storage servers (server farms) as more data is collected. The company is not afraid of acquiring other companies, and the existing data must be continuously updated. All of this investment spending subtracts from net profits, and already has Wall Street analysts questioning the expenditures. If Google misses a quarterly profit estimate as a result of investments, Google's stock could drop swiftly.

Google has but one successful and profitable business model, which is search advertising. Right now the revenues are huge and growing, as well as the profit numbers. No other business areas introduced have been very successful, such as Google Apps. Some are not very easily understood by most people and so are ineffective in attracting users.

The search market is changing, with very narrow niches serviced by decent search engines. The search market may very well go the way of the television channel specificity, i.e., a food channel, a golf channel, and so on. Local search engines are already in use that have been developed for city or state job opportunities, available services, cultural event destinations, and other dedicated purposes. Localized search engines tend to be less inclusive and more specific, bringing up fewer irrelevant results lines. Their proliferation could easily translate into market-share losses for Google and another chance for falling stock prices.

Another important issue is called "click fraud," where software algorithms have been developed that can repeatedly click on dummy web addresses. Google invoices the advertiser for the fraudulent clicks along with any valid clicks, and Google shares a percentage of its own ad revenue to the dummy web sites. You can see how click fraud would play havoc in this virtual system, which depends upon accurate accounting of hits. Some click fraud estimates have been close to 15% of total results, which means that Google is vulnerable to overcharging advertisers and paying fraudulent web site owners based on thousands of phony results. Google and other search engines are trying to identify these fraudulent clickers, but advertisers are demanding more, such as reimbursement for fraudulent clicks. Both actions lessen Google’s profits. The more Google’s profits decline, the higher the chance that Google will miss Wall Street’s already high expectations. And, if a profit estimate is missed, the price of Google stock could plummet.

• Conclusion

For the moment, Google is king of the hill and will be a formidable force to overcome. But with such a huge market so laden with riches, competition is sure to become fierce. And anybody can build a search engine. Each quarter, Google manages to beat Wall Street’s expectations. Still, until recently, the stock price has risen very little in review of the last few quarters. All it would take is a substandard quarter, and the Google stock price is likely to drop precipitously.

So, my original recommendation still stands: Buy Google, but only if you can endure the price volatility, lose money, and still sleep soundly at night.

Bill Durrenberger is an award-winning public speaker who is available for speeches or presentations on companies and technologies.  He will also be happy to research and provide a written custom evaluation report on a specific company or a technology by request.

Copyright Bill Durrenberger June 29, 2007 All rights reserved. Disclaimer: The statements and information presented in this article reflect the opinions of the author and do not constitute a recommendation to buy or sell specific securities.