A Bearish Thesis on the Bearish Thesis for Google
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Risk and reward generally go hand in hand. But Google (NASDAQ: GOOG) seems to have ruined this partnership. The risk reward ratio for Google is pretty attractive right now as the risks have not panned out the way they were supposed to. We believe that Google could see a share price upside as investors recognize that social networks are less of a threat than previously feared, mobile might be more incremental than cannibalistic, and Motorola Mobility (NYSE: MMI) integration could add to operating incomes. Therefore, we rate this stock as a buy.
Competition from social networks- less of a threat than assumed
A primal concern from investors has been social networks taking majority shares from established forms of online advertising, such as search engines. One of the major threats was Facebook (NASDAQ: FB). The hunter has become the hunted now as Facebook is failing to attract advertisers through its new products. The available social network advertising products, such as side-rail display ads and sponsored stories from Facebook, do not appear to have discouraged advertisers from increasing search campaigns on Google. Furthermore, we believe that Google is a better alternative for advertisers as Google targets the consumers by analyzing the search queries rather than the demographics and interests. For example: if one wants to buy shoes in New York, one could just type “Shoes New York” in Google and be directed to the advertiser, while in a social network one doesn’t get that kind of functionality. May be that was one of the reasons for why General motors pulled off their advertising from Facebook. To conclude, we believe that the Social networks won’t be able to affect search businesses anytime soon as they generally serve a different purpose and don’t provide the same sort of functionality that a search engine does.
Mobile monetization offering Google more flexibility than other internet companies
Mobile monetization has been a problem child for advertising companies as it is making investors fret about the effects the growing mobile usage. As Facebook and Zynga (NASDAQ: ZNGA) are struggling with the increasing mobile usage, we believe that Google was one of the first companies to have realized the implications of the growing usage of smartphones. To understand the basics of Mobile monetization we need to see how it works:
Advertising Search Revenue = Number of queries X Click through Rates X Coverage ratio X CPC
While we understand that the mobile queries currently generate lower CPC rates than the PC queries, we believe that the sheer volume of mobile queries would more than offset the effect due to lower CPC rates. When we compare Google with its Chinese counterpart Baidu (NASDAQ: BIDU), we notice that Google enjoys a much higher coverage ratio (i.e. the number of advertisements per page on Google is five times that of Baidu). Furthermore, according to a recent study by Marin software, Click through rates are 72% higher in mobile search compared to desktops. If this is indeed the case, increasing mobile usage could be a boon in disguise for Google.
Source: TheAnalystHub.com Research
Furthermore, with internet users getting the capability to shop for time sensitive deals such as restaurant meals, movie tickets etc. (which they didn’t get on PC), we could see the purchasing activities shifting online, which might further benefit Google.
Motorola acquisition not as bad as feared
We believe that one of the reasons for Google’s low valuation has been investor’s fear of a messy Motorola Mobility integration. Recent press releases suggest that Google is currently trying to sell Motorola Mobility’s Home division, which manufactures television set-top boxes and other non-cellular products. We believe that this is a step in the right direction as Google is trying to benefit from Motorola Mobility’s patents and smartphone hardware expertise without overextending itself. We are also positive on Google’s recent decision to suspend the launch of Nexus Q media hub. We believe that this shows a new discipline as Google is taking an approach to quickly cut poorly-designed products. While the revenue contributions for Motorola Mobility may decline in the near term due to the fewer product offerings with this approach, we believe that the costs would decline much faster leading to increase in Motorola Mobility’s currently low margins.
The Bottom Line
We have discussed risks that Google faces above. Talking about the positives, we are confident about Google’s dominant position in search, increased traction of the display initiatives and continued success of Android. As the stock currently trades at a forward PE of 20.08, we believe that the valuation remains attractive when compared to its comparable peers like Baidu at a PE of 34.66 and Yandex (NASDAQ: YNDX) at a PE of 31.66. Hence we rate Google as a buy.
TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu, Facebook, and Google. Motley Fool newsletter services recommend Baidu, Facebook, 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.
