Should I Buy Google? 3 Pros, 3 Cons

by Tom Taulli | August 13, 2012 1:16 pm

While most of Wall Street is pretty much on vacation, Google (NASDAQ:GOOG[1]) has kept busy. On Monday, the company announced that it is purchasing the popular travel book business Frommer’s, but also that Motorola Mobility will be laying off 4,000 employees[2].

Google’s up more than 2% on the news, continuing its summer run. Since late June, Google has seen a nice rally, with the shares up 16% — more than triple the Nasdaq’s returns.

While the company tries to keep forging on through both addition and subtraction, should you buy Google stock? To see, here’s a look at the pros and cons:

Pros

Diverse Business: Search remains Google’s core business, and the company dominates with about 60% of the market share. But over the years, the company has used its large cash flows to move into other categories. The main ones include AdMob (mobile advertising), YouTube, Android and Chrome. Google also continues to experiment with new ideas, such as Project Glass and the Nexus 7 tablet[3].

Cloud: This computing trend has become a huge market as companies want to get the benefits of web-based applications, and Google is using its technical expertise to get a piece of the action. The company already has a thriving business with productivity apps, which counts 5 million business. And Google also recently launched its Compute Engine — a cloud platform similar to Amazon’s (NASDAQ:AMZN[4]) that acts as a virtual infrastructure for businesses.

Local Commerce: Groupon (NASDAQ:GRPN[5]) is the current leader in the market, but it is vulnerable. The company has had operational challenges, and continues to face competition on all sides — such as from private rival LivingSocial, and even Google. GOOG is leveraging its fast-growing mobile platform, bolstering its offerings through key acquisitions like Frommer’s and restaurant rater Zagat[6].

Cons

Motorola: The acquisition has had some advantages. Perhaps the most important was getting the patent portfolio, which will be helpful in fending off litigation from Microsoft (NASDAQ:MSFT[7]) and Apple (NASDAQ:AAPL[8]). But Motorola has some major risks, such as with integration and lower margins; the division’s lack of profitability led to Monday’s layoff announcement. As seen with companies like Nokia (NYSE:NOK[9]) and Research In Motion (NASDAQ:RIMM[10]), the mobile device business can be brutal.

Social: Google’s G+ service has 250 million users, but engagement continues to be problematic. Despite the lack of popularity of its stock, Facebook (NASDAQ:FB[11]) itself continues to be extremely popular and is near 1 billion users. And in hopes of improving monetization, Facebook is trying to innovate its advertising offerings, which could take business away from Google.

Global Economy: So far, Google has been immune to the global slowdown, but prolonged weakness — especially in the U.S. and Europe — could be a drag on the company, especially if companies begin to cut their marketing spends.

Verdict

Despite some risks, Google has a diverse business and should continue to benefit from major trends in technology, such as search, mobile and the cloud. The company also generates substantial cash flows, which came to $4.3 billion in the latest quarter — though it still hasn’t deigned to tap that cash to pay out a dividend[12].

Still, the valuation of Google — at 19 times trailing earnings and 13 times forward earnings — is pretty reasonable, especially in light of its growth prospects.

So should you buy Google stock? Yes — for now, the pros outweigh the cons.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[13], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling”[14] and “All About Commodities.”[15] Follow him on Twitter at @ttaulli[16]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  2. laying off 4,000 employees: http://investorplace.com/2012/08/google-slashes-4000-jobs-at-motorola-mobility/
  3. Nexus 7 tablet: http://investorplace.com/2012/07/prepare-for-the-coming-tablet-war/
  4. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  5. GRPN: http://studio-5.financialcontent.com/investplace/quote?Symbol=GRPN
  6. restaurant rater Zagat: http://investorplace.com/2011/09/google-buys-zagat-goog/
  7. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  8. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  9. NOK: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOK
  10. RIMM: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIMM
  11. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  12. still hasn’t deigned to tap that cash to pay out a dividend: http://investorplace.com/2012/08/sampp-dividend-laggards-aapl-dell-aes-nrg-psx-goog/4/
  13. IPOPlaybook: http://investorplace.com/ipo-playbook/
  14. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  15. “All About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  16. @ttaulli: https://twitter.com/ttaulli

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