It’s been a tough year for many mega tech operators like Oracle (ORCL), Apple (AAPL) and Facebook (FB) — all of those companies have lost money for shareholders in 2013. However, Google (GOOG) has had a stellar year, gaining of 26% on the stock market and bringing the market cap to $294 billion.
But can the company keep up the momentum? As Apple knows all too well, even the hottest tech company can experience a sudden plunge on the market.
So, to get sense of Google’s prospects, let’s take a look at the pros and cons:
Big Bets: This is crucial for any tech business to be sustainable. There must be big leaps in innovation, not just tweaks or incremental changes. And yes, Google’s DNA is all about big bets. The result has been products like …
- Chrome: It is now the world’s most pervasive browser, with more than 750 million users.
- Android: It has a base of over 900 million phones and gets 1.5 million activations per day, making it the world’s largest mobile operating system.
- Gmail: The service revolutionized email by providing 100 times more storage than the competition. Now, Gmail is the dominant player with over 425 million users.
- YouTube: A billion users watch more than 50 million hours per day of online video.
Going forward, Google is looking at some other potentially game-changing technologies, such as self-driving cars, Glass, high-speed Fiber rollouts and even Internet access in Africa (using balloons). True, these aren’t guaranteed to be successful. But the more important thing is that the company is investing in the future — and wants to be a part of tomorrow’s megatrends.
Multi-Screen Approach: Google is building its products for multiple platforms. That means the technology needs to work seamlessly, such as across the desktop, laptop, phone or any other connected device. So far, Google has done a good job with this, but the company has also been building systems for monetization. To this end, there is Play, which provides access to films, music, books and other premium content. There is also a sophisticated enhanced ad delivery system. This makes it much easier to put together multi-screen campaigns.
Financials: The company’s numbers are solid. In the first quarter, revenues climbed by 31% to $13.97 billion and net income went from $2.89 billion to $3.35 billion. Operating cash flows came to $3.6 billion. In all, GOOG has about $50 billion in the bank.
Motorola: Google bought Motorola back in the summer of 2011. While it helped bolster its patent portfolio — which is crucial in the mobile world — the deal hasn’t been a winner. Motorola failed to launch a successful handset and, as a result, continues to lose ground against mega players like Samsung (SSNLF) and Apple. For the most part, Motorola is a niche player, with Q1 revenues at only $1 billion and an operating loss of $271 million.
Social Networking: Google missed this megatrend. While it has tried to catch-up with G+, the results have been lackluster — Facebook remains the dominant player in the space. In fact, there are a variety of startups, such as Snapchat, which are seeing lots of success on mobile platforms. If anything, Google may need to ramp up its dealmaking, as it did with video (YouTube) and mobile (Android). Interestingly enough, the company recently shelled out $1 billion for Waze, which is a social network that crowdsources maps. This could just be the start of aggressive M&A.
Valuation: The stock is still on the expensive side. The price-to-earnings ratio is at 27X without the benefit of a dividend. By comparison, Apple stock is only 10X with a dividend yield of 3.1%.
When Google went public nine years ago, there was a lot of skepticism about whether the company could go beyond its core search business. Obviously, it did, and as a result the stock price has been a huge winner — up a staggering 718% since then.
As for the future, it seems reasonable that the growth will continue. Google has fostered a culture of innovation and experimentation leveraging thousands of brilliant engineers, not to mention massive platforms like YouTube, Chrome, Android and the search business.
While the valuation is on the high side, this is to be expected for a company that has attractive growth prospects.
So should you buy Google? Yes — for now, the pros outweigh the cons on the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.