During the past year, Google Inc (GOOG, GOOGL) stock has lost some of its luster. Since hitting a 52-week high in February, the shares are off about 19%. Google’s performance is particularly disappointing in the face of gains from other tech operators like Facebook Inc (FB), up 9% in that time, and Yahoo! Inc. (YHOO), which has gained 23%.
Wall Street analysts have also turned sour on GOOG stock. In the past few weeks, Stifel Nicolaus dropped its rating from “buy” to “hold” and Bank of America Merrill Lynch downgraded the stock from “buy” to “neutral.” Even billionaire Mark Cuban thinks Google stock is an interesting short.
All that news makes the outlook seem kind of grim for GOOGL stock. Let’s take a look at the stock’s pros and cons to see if there’s any good news on the horizon.
Google Stock Pros
Mobile and Online Video. These two markets should provide massive growth for GOOGL as ad dollars continue to shift from traditional sources to digital. Android has more than 1 billion active users — stunning growth for a platform that GOOGL bought in 2005 with little fanfare. GOOGL also bought YouTube in 2005 for $1.65 billion and while that deal also was initially puzzling for many on Wall Street, it now looks dirt cheap as YouTube developed into the dominant player in online video with more than 1 billion users. It reaches more adults in the coveted 18-34 age-range than any cable network.
Innovation. GOOGL has a culture of experimentation and creativity. The result has been the launch of many breakout offerings like Gmail, Chrome, Docs and Maps. But perhaps the most impactful could be an aggressive move to dominate the market for the smart home. To this end, GOOGL shelled out $3.2 billion for Nest, which is the innovative developer of smart thermostats and smoke detectors. But there have been other interesting tuck-in deals, such as for Dropcam (a provider of home security via the cloud) and Revolv (which has a platform that manages multiple apps within a home). According to a study from Grand View Research, the market for smart home technology is expected to grow from $13.1 billion in 2013 to $47.6 billion by 2020.
Valuation. It is reasonable for GOOGL, with a forward price-to-earnings ratio at 16X. This compares to 40X for Facebook, 44X for Yahoo and 19X for AOL, Inc. (AOL). The GOOGL valuation is also attractive in terms of the expected growth. Even with the recent downward revisions, the Wall Street estimate for earnings is for an 17% increase for 2015.
Google Stock Cons
Search. This is still the main driver of revenues for GOOGL. But the business is feeling the pressure. Last year, the company’s U.S. share dropped from 79.3% to 75.2%. Part of this came from gains of Yahoo, which recently became the default search engine for Firefox. But even social networks like Twitter Inc (TWTR) and Facebook are becoming platforms for search. There is even buzz that Apple Inc (APPL) may drop GOOG as the mobile search engine for iOS.
Failures. Over the years, GOOGL has had no shortage of flops, including Google Glass, Google Wallet and Google Plus. No doubt, failure is an inevitable part of innovation. But then again, it should still be a matter of concern. For example, the problems with social networking could pose a big problem for GOOGL. The category has become a big source of growth in online advertising, as seen with the success of Facebook. But emerging social networks like Pinterest and Snapchat are also ramping up their monetization efforts. In the end, this could put pressure on GOOGL.
Overstretch. For highly successful companies that generate substantial cash flows, it is natural to keep expanding. But it could ultimately result in many problems. Let’s face it, managing lumbering organizations can be extremely tough. This has happened to companies like Cisco Systems, Inc. (CSCO) and Hewlett-Packard Company (HPQ). As for GOOGL, it could also face the same situation. The company is targeting many large, highly competitive markets and the headcount is at a hefty 55,000. In light of this, it could get tougher to be nimble and innovative.
Google Stock Verdict
It’s hard to believe what GOOGL has accomplished since its founding in 1999. The company now has a market cap of $340 billion.
And going forward, GOOGL looks poised to benefit from further growth, especially from mobile and video. But there could be other drivers like the smart home.
Despite this, GOOG stock could still be vulnerable, at least in the near-term. Keep in mind that the company has generally missed earnings estimates lately. And, with the surge in the U.S. dollar, there could be further pressure on the financials. Actually, with much of the growth slowing across the globe, there may even be cutbacks in ad spending.
So while GOOGL looks attractive in terms of its long-term potential and valuation, it probably still makes sense to hold off until after the next earnings report on Jan. 29. After then, there may be an even better valuation for 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.
