Google: Large and Growing, But Still Not Evil
“Don’t be evil” is Google’s informal corporate motto. Yet, massive and dominant corporations find it difficult to escape being labeled “evil” at some point or another. As Google moves swiftly into markets adjacent to its core search advertising business (here’s our report on Google Fiber), the tech giant risks running afoul of anti-trust regulations and attracts greater regulatory scrutiny with each acquisition. Moreover, the company’s growth places it squarely in competition with other expansive technology goliaths including Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), and the now lethargic Facebook (NASDAQ: FB). So what value does the growing Google octopus hold for individual investors?
Beyond Search
First, a quick synopsis of Google’s most notable recent acquisitions and initiatives:
- Google Play – a recently launched entertainment application for music, television, and movies.
- Google Fiber – a fiber optic Internet network capable of reaching connection speeds of up to 1,000 Mbps.
- Google Drive – a cloud-storage and group collaboration workspace integrated with Gmail and Google Docs.
- Acquisition of Motorola Mobility – the centerpiece of the company’s push into mobile and communications hardware. Motorola Mobility will be run as a separate company whose wares are intended to complement the Google’s Android platform.
- Acquisition of Frommer brand and Zagat – Google acquired the Frommer’s brand of travel guides in early August 2012 and Zagat, a restaurant review company, early in the summer of 2012. A Google representative expressed that the acquisitions were made as part of an effort to “provide a review for every relevant place in the world.” Google also acquired travel software-maker ITA in April 2011.
- Self-driving automobile technology
- A Google tablet
- Google Offers (basically Groupon with a new face)
- Several strategic investments in renewable power sources for the dual purposes of powering a number of the company’s data centers and selling energy to the grid.
Google’s recent initiatives fit a pattern of a company reaching beyond its core business and seeking to control adjacent markets; search advertising complemented by influence over Internet content, the hardware (mobile and tablet) used to consume such content, and even the electricity used to power company data centers.
The financial returns from the aforementioned initiatives, as well as a plethora of others not specifically mentioned, could be great. Cross-platform integration of adjacent products and services can be a boon to the company if implemented well. Apple’s integrated software-hardware offerings are an appropriate example. Yet Google’s plans seem more ambitious. The company seeks to offer hardware and software and content, while also moving into the supply side through energy projects. Not to mention Google Wallet, Google cars, numerous web-based applications through both organic growth and strategic acquisitions, and many more initiatives.
Financials
Google’s financial position is as strong as its product offerings. The company’s annual revenue has been growing by 20% or more for years and many analysts predict similarly strong growth in coming years. Annual earnings in 2011 grew by about 13% over the previous fiscal year and 2012 EPS growth is expected to top 40% by some estimates. The company’s net margin in 2011 was a solid 27%. Google’s 5-year expected PEG is a mere 1.2 and its P/E is 20 – strikingly average for a swiftly expanding technology company.
Moreover, the stock is a darling of Wall Street; 155 hedge funds have positions in the company – 2nd only to Apple. There are no sell or underperform analyst ratings on Google. This author is not going to distinguish himself with a dissenting opinion.
Risks
Google’s strategy seems to have three primary risks: Attracting regulatory ire; inciting fierce competition with other tech giants attempting a similar type of integration; and – the ever-present risk in the technology sector – loss of competitive advantage for some reason.
Regulatory scrutiny of the Motorola deal was fairly intense and several third parties called for anti-trust action against the company in reaction to its recent Zagat and Frommer acquisitions. The risk of anti-trust action will inevitably grow as the company expands.
Google’s recent initiatives will also bring it into more direct competition with companies that previously occupied a market sphere tangential to Google’s. Such a circumstance could drastically shrink margins should cost competition win out over product-differentiation.
A loss of competitive advantage for any reason – failure to continue to attract talent, failure to successfully integrate acquisitions, poor cohesion among the company’s various segments, etc. – is an ever-present risk in the technology sector. Although the company is renowned for attracting some the most talented individuals in the world and is well-managed, the smallest stumble can make it vulnerable to its expanding competitors.
Finally, Google’s advertising revenues cannot sustain 20%+ growth rates forever and when the market begins to mature, growth rates will inevitably fall. Thus, relying on the company’s lucrative search segment may not necessarily be an attractive option for a company that clearly has more grand and expansive ambitions and is more or less expected to be infallible by investors.
Conclusion
Google’s mission of organizing and monetizing the world’s information is as flexible and pregnant with opportunity as it is vague and difficult conceptualize. The company’s search business is incredibly successful. Its efforts to control adjacent market spheres could be a boon for investors – contingent upon regulatory acquiescence. Historically, Google’s ventures beyond search have generally been quite successful, the Android mobile platform in particular. Although to be fair, Google+ is a notable exception. Ultimate verdict: Stock is a long-term buy. Ask 155 hedge funds. They’ll tell you. Just don’t be evil.
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Disclosure: The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours. He does, however, have the intention of rating these stocks on WealthLift.com, a social media website where investment ideas are shared openly and free.
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