Three Reasons to Buy Google After the Dip
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Google ) crashed by 9% on Thursday after the company's results were leaked to the market before the scheduled time. Not only where the numbers unexpected when it comes to timing, earnings were below analysts’ estimations too. This last report, disappointing as it was, may present a buying opportunity for investors looking to acquire a unique business at an attractive entry price.
The biggest conclusion for the data is that Google is paying the cost of the transition towards mobile. Mobile ads are cheaper than desktop versions, and this has a negative effect on profitability. The acquisition of Motorola is another factor taking its toll on profit margins. This was something to be expected, although the amount of the extra costs were above analysts’ forecasts.
The question of the hour is: does the recent set back represent a buying opportunity or is it the last chance to abandon Google before things keep getting worse? Three reasons why I believe Google should be bought on this dip-
1- Dominant in Desktop
According to data from ComsCore, Google owns an almost 67% of the US search market, followed by Microsoft´s ) Bing which has a market participation near 15.5% and Yahoo! ) at a 13%. Keeping in mind that Yahoo is powered by Microsoft, it makes sense to analyze them both together; still a market share of 28.5% would be well below half of Google's size.
Google has become so dominant in search that we just “Google” something when we want to find information about it, and that gives the company an rock solid position in online advertising.
2- Dominant in Mobile
Google´s Android is the leading smartphone platform in the world: IDC reports that Android surged to a whopping 68% share of the global smartphone market last quarter. That's four times the 17% market share held by Apple ). The iPhone 5 will help Apple over the following quarters, but Android is more used in low cost devices, which means a bigger portion of the market.
In the low end of the price spectrum, RIM ) is actually fighting for survival with a market share of less than 5%, the Canadian company has been losing market share since 1999.
Google has been spending some serious money to secure a place in mobile, and the strategy is bearing fruit. The company gives Android away for free, so it doesn't make any direct money from it, but it does put Google in a privileged position regarding the mobile revolution. The company has a tremendous market share above 90% in mobile search.
3- Plenty of Growth Opportunities Ahead
Google is famous for investing in different projects with little monetary sense in the short term, the company's driverless car and augmented reality glasses are two of the most notorious examples. But these technologies could have some very relevant applications in the future, and they demonstrate that Google is still an innovative company with leading technological strengths.
YouTube, which was a much criticized acquisition in 2006, is already generating sales and has a fantastic potential for growth in the middle term. Google invests the big cash flows produced by its search business in projects which may seem eccentric or too expensive, but they also position the company in the frontlines of innovation and disruption. YouTube, Android and Chrome are some examples showing that the company's management understands the industry and has a long term commitment to creating strategic value for shareholders.
Bottom Line: Buying Opportunity
The company has a very solid balance sheet and generates big fat cash flows on a regular basis, so financial soundness is out of discussion. A period of diminished profit margins due to the transition towards mobile will not bring Google down, nor will it change the company's long term fundamental attributes. The recent fall should be interpreted as a chance to buy this high quality industry leader at an opportunistic price.
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acardenal owns shares of Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, Microsoft, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.