7 Core Growth Stocks for Your Portfolio - Google
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investors can prime their portfolio for success by building on a collection of core growth stocks. These are remarkable businesses with the potential to deliver a decade or more of great returns. But to be considered a core holding a company requires 1) a sustainable competitive advantage and 2) a visible growth trajectory. In this series I'll present seven companies that can perform that role.
Google (NASDAQ: GOOG) is a remarkably successful company building a cash flow machine online while consolidating its strengths in new products and technologies. The company is well positioned in emerging technologies and has the potential to deliver superior growth over the next decade.
Why it's a core stock
Even famed investor Charlie Munger has admitted 'Google has a huge new moat. In fact, I’ve probably never seen such a wide moat.'
Great businesses dominate their respective industries, and there's no doubt Google dominates search. According to a report by ComScore, Google owns nearly 70% of the U.S. search market.
In this industry market share represents a competitive advantage allowing Google to use historical searches to improve future results. Google is a better because it's bigger. Google is bigger because it's better. This type of network effect feeds on itself and prevents competitors from gaining ground.
Microsoft (NASDAQ: MSFT) has tried and failed to build a viable competitor to Google through its Bing search engine. But after five years and burning $10 billion in its online service division, the company has little to show for its efforts. Last quarter, Bing lost $283 million. Worse, Microsoft has only a minimal presence in mobile search, which is where all the growth is.
But while Bing is gaining some traction, most of this is coming at the expense of Yahoo! (NASDAQ: YHOO). Since 2007, the company's share of U.S. desktop searches has declined from 28% to 12% today.
How did Yahoo! fail so miserably? Fundamentally the company has never defined a vision of who it wants to be and who it wants to serve. Through a series of failed acquisitions (e.g. Flickr, del.icio.us) the company has withered away its lead in the industry.
Yet despite its top position, Google continues to widen its lead over competitors. Projects like Android and Chrome are designed, not to produce profits, but rather to direct traffic to its search engine and protect the core business. Because these services are given out for free, Google isn't just building a moat but salting the earth within a 10 mile radius of the company to ensure no competitors can set up shop.
And these competitive advantages have translated into big returns for investors.
More importantly, Google is well positioned to exploit some of the biggest trends in the technology space.
Mobile ad spending grew 47% in 2012 to $1.8 billion. According to estimates provided by eMarketer, mobile ad spending is projected to grow to $4.5 billion by 2015. Because the Android OS commands 75% of mobile devices worldwide, Google will capture most of this growth.
Video ad spending is also projected to explode over the next three to five years. According to eMarketer, online video spending is set to grow from $4.14 billion in 2013 to $8.04 billion by 2016. YouTube, the number one video service on the Internet, will take most of the growth in this category.
Risks to watch
Of course, the technology landscape is evolving and Google could find itself on the wrong side of the next major development. Google itself illustrates just how fast this industry is changing. Only 15 years ago the company was nothing more than a university science project.
Here're two key risks to watch out for.
First, new technology could reduce the effectiveness of search. Index spammers could reduce the integrity of the company's search results, propriety document formats could prevent the search engine from accessing content, and new technology could block advertisements.
Second, new legislation could impede the company's growth. Today, Google rules over the Internet like a 21st century robber baron. But recently the company has come under scrutiny from governments, who see the company's moat not as a strength but as a threat because of its anti-competitive implications. Google is routinely under review for privacy issues, piracy, and copyright infringement. Investors may be better served listening to gossip from Washington D.C. than Silicon Valley.
Foolish bottom line
In the case of Google, its strategic positioning is what sets it apart from its peers. Because Google commands a dominant position in several high-growth sectors of the economy, this company belongs as a core holding in your portfolio.
It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!