Bet Against Google? Are You Crazy?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sometimes going against the grain in the stock market makes sense. If a stock is significantly overvalued, and investors are unrealistic about its prospects, some investors will short a hot stock hoping to benefit from its fall. Betting against a successful company just because the shares have increased in price, can be the height of foolish (small f) thinking. That's why a recent pick by Sean Williams of Fool.com surprised me so much. Sean suggested that he was going to bet his CAPS reputation that among others, Google (NASDAQ: GOOG) would underperform the market in 2013. I'm a big fan of Sean's writing, but I'm not sure I agree with this pick!
Millions Use Google Everyday:
Google really should need no introduction as millions and millions of people use at least one of its services every day. Whether it's Google search, Gmail, Docs, YouTube, Drive, QuickOffice, or an Android powered smartphone, not having this company's products would severely alter most people's daily lives online. Of course Google faces competition for nearly every service it offers. Whether it's Google Docs taking on Microsoft (NASDAQ: MSFT) Office, or Android taking on Apple's (NASDAQ: AAPL) iOS, competition is everywhere. However, newer projects like Google Glass offer the potential for wearable computing through glasses, and self driving cars that already power, the company's Google Maps could change the auto industry. These two projects could serve to power Google's future earnings growth. This being said, Sean has some very specific concerns about Google that require answers.
Google is The PC Search Leader But Mobile is a Work in Progress:
One concern that investors might have, is that Google may not dominate mobile in the way it has the PC world. There are two reasons that this worry is overblown. First, as Sean acknowledged, Google is the leader in PC search. Earlier this year, the company commanded over 66% of the search market. Running behind Google, what has generally been happening is Bing is stealing from Yahoo and everyone else is just running in place. Whether everyone thinks about it or not, mobile users and PC users generally overlap. You would assume then, that mobile users would follow their desktop habits and according to recent research, that's exactly what is happening. In fact, 92% of mobile search is being done through Google. This actually makes a lot of sense, Android is the leading mobile operating system and runs Google Search as a default. The rest of mobile search is being done by iOS users who have Google as their default search provider on their browser. In fact, I would make the argument that mobile isn't really a “work in progress” at all. This market has been largely decided, and what users are saying is they prefer Google search, which drives Google's continued dominance.
What Affect Will The iPhone 5 Have on Android Smartphone Sales?
This issue makes an incorrect assumption that we need to correct right away. Assuming that the iPhone 5 harms Google because it's not an Android powered smartphone is not necessarily correct. While it is certainly easier for Google to maintain mobile search dominance if Android is the most popular operating system, it's not necessarily a requirement. Android currently commands about 52% of the smartphone market with iOS coming in second at just over 33%. With some of the most popular smartphone manufacturers like Samsung, HTC, and Motorola building phones around Android, it's unlikely that Google will lose its mobile operating system market share. Though iOS competes with Android, when it comes to mobile search it actually is an ally. The default search engine on iPhone and iPad is Google if you use the Safari browser. In addition, the number one free iPhone app is YouTube, and Google also has six other free apps in the top 100, and Google+ sits at 103. With over 700,000 apps on iTunes, for one company to have eight different apps in the top 103 is an impressive feat. The bottom line is, Google doesn't lose just because sales of iPhone are strong as iOS users clearly prefer Google services as well.
What About Motorola Mobility, Was it Just About the Patents?
Google's purchase of Motorola Mobility has been criticized and questioned ever since it was announced. In truth, there were two good reasons for this purchase. First, it was about the patents. At the time of acquisition Motorola had about 17,000 patents. Some have speculated that about half of the value of this acquisition was for the patents alone. If we make this assumption, the company paid about $370,000 per patent. This seems reasonable given that prior Nortel patents were sold for about $750,000 each, and InterDigital just sold patents to Intel for about $220,000 per patent. With an average price between these two deals at about $485,000, it seems like the Motorola deal wasn't that far off after all. The second reason Google made this acquisition is, Motorola still can be a top hardware manufacturer. Everyone seems to have forgotten that at one point Motorola was one of the most well respected hardware manufacturers. In fact, it's funny that no one questions Apple when they produce hardware and software in house. However, when Google makes a purchase that could seemingly duplicate this type of integrated design, everyone questions it.
It seems clear looking at each of these concerns individually, that none of them should be an impetus to bet against the stock going into 2013. When you consider that paid clicks have increased sequentially from a 34% increase in December 2011, to 42% growth by June 2012, it's clear that Google's core business is only getting better. Though the stock has had a decent run, the shares still trade for a multiple just slightly above the company's projected growth rate. As I said before, sometimes it makes sense to go against the grain if a company's future prospects are in doubt. However, nothing could be further from the truth as Google's future has never looked brighter.
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MHenage owns shares of Apple. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple and Google. 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.