by Tom Taulli | December 5, 2013 10:47 am
With a market cap of $354 billion, Google (GOOG) is one of the world’s most valuable companies. It certainly helps that the stock price has been on fire in 2013, with shares of GOOG up almost 50%. This compares to a return of just 34% for the broader Nasdaq. GOOG stock has also benefited from the big bull move in social stocks like Facebook (FB), LinkedIn (LNKD) and Pandora (P).
Even though Google is 14 years old, the company still acts like a nimble startup. The result is that it has been able to capitalize on megatrends like mobile, video and the cloud. All of these have been nice drivers for GOOG stock.
But with the recent rally, are shares of Google stock worth it? To see, let’s take a look at the pros and cons on GOOG stock:
Franchises. While online search is the core business for GOOG, the company has effectively used its cash flows to expand its footprint into diverse categories. YouTube, which it bought for $1.65 billion in 2006, has turned into a massive success. As a testament to its power, it delivered 62 million views for Dove’s recent “Camera Shy” ad campaign. But there are also other top offerings like Gmail and Chrome. Although, the most important — especially for GOOG stock — may be its Android mobile operating system. It is logging an amazing 1.5 million installs every day.
Innovation Culture. The tech sector is brutal, as seen with the many companies that have failed to innovate. Just look at some recent examples like BlackBerry (BBRY) and Nokia. But one thing driving Google stock has been the company’s deep culture of innovation. Heck, it almost seems like the company is downright wacky. When GOOG launched its Android mobile operating system years ago, it seemed quixotic … and the craziness has not changed much. For now, the company is experimenting with such things as driverless cars, Google Glass and balloons that deliver Internet access. No doubt, some of these will fail. Yet it only takes just a few innovations to make a huge difference, right? And Google certainly understands this game, which has allowed for a strong long-term performance of GOOG stock.
Monetization. Innovation is not only about creating cool products. GOOG also understands that it is also important to find new ways to make money — something that has held back rival tech names like FB and TWTR. To this end, Google has added important features to make it easier to put together integrated ad campaigns that span the web, mobile and video. That means leveraging data to target ads based on interests, location and user behavior. But to help lift GOOG stock even more, the company has also been trying to expand beyond ad revenues.
A key part of this is with its Google Play system, which provides access to films, music, books and other premium content. There are also moves into e-commerce, as GOOG tries to get a piece of the revenues from Yelp (YELP) and Groupon (GRPN). The result is that GOOG has remained a huge cash generator. In the third quarter, Google brought in a haul of $5.08 billion, up from $4 billion in the same period a year ago. In all, there is $56.52 billion in the bank. It means that the company can remain a big buyer of GOOG stock and also invest aggressively in R&D and acquisitions.
Motorola Acquisition. It’s still been a drag on GOOG stock. After all, the much ballyhooed Google Moto X phone has been a disappointment so far. There have also been some notable PR flubs, with the most recent coming on Cyber Monday. The website melted down because of problems with the Moto Maker customization system — and that could have been a missed opportunity. The fact is that the handset market is brutally competitive, as seen with the implosions at companies like Nokia and BlackBerry. For the most part, Apple (AAPL) and Samsung (SSNLF) have huge advantages — in terms of their brands, infrastructure, access to supplies and the ecosystem. The good news for GOOG stock is that the company has a diversified platform … but the handset business could still suck resources and become a money pit.
Overstretched. This could perhaps be the biggest threat to the value of GOOG stock. That is, by being in so many businesses — with entrenched competitors — there is the risk of managerial distraction. In fact, this is a pretty common problem in the tech world. If the same thing happens to GOOG, it may mean that the company could neglect some of its core cash generators, such as AdSense and AdWords categories. This would certainly be a big problem for GOOG stock. And other companies have suffered from the same problem, like Cisco (CSCO) and Microsoft (MSFT).
Rich Stock Value. Gogle stock is far from cheap. Consider that GOOG has a forward P/E of 20, and there is no dividend payout. Plus, there are some more affordable alternatives, such as Apple. AAPL stock sports a low forward PE of 11 and pays a dividend of 2.3%. That makes GOOG stock pale in comparison.
Again, Google stock does have some issues. By being in so many markets, it could be tough to manage the complexity … and the result could be the erosion of core Google businesses.
But then again, GOOG has the advantage of being a leader in high-growth segments like mobile, the cloud and video. The company also continues to invest heavily in R&D to maintain its competitive advantages … and also to make big bets on acquisitions.
True, the valuation on Google stock is not cheap. But this is to be expected, especially in light of the company’s strong position and long-term growth potential.
So should you buy GOOG stock? 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.
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