The complicated relationship between Google Inc (GOOG), whose motto is “don’t be evil,” and the Chinese government, which has a history of stifling dissent and jailing political prisoners, is about to get even more complicated.
And considering the headwinds already beating against Google stock, that’s particularly worrisome.
Though many experts are expecting Beijing to set 2015 growth targets at 7%, which is more than double the 2.5% expected in the U.S., that represents a significant slowdown from the double-digit growth seen in recent years in China.
Indeed, China is expected to miss its 7.5% growth benchmark in 2014, the first time that has happened since 1998. Of course, many economists don’t view the Chinese data with a grain of salt. It’s more like a truckload, which is why many observers on Wall Street are especially nervous.
The Wall Street Journal addressed the topic last week:
“There is general agreement on the economic steps China must take to further improve citizens’ lives, maintain sustainable growth and boost its global role. These include shifting from heavy government spending to consumption and services; moving low-end manufacturing into high-end production; and automating and innovating as labor costs rise.”
Companies in China are having to pay higher wages to meet the demands of the growing middle class and many foreign businesses are as eager as ever to tap into that huge market. China already is the world’s largest wireless market and is expected to overtake the U.S. as the world’s largest economy at some point in the not-too-distant future, though there is plenty of debate as to when this wondrous moment will occur.
There is plenty that can still go wrong in China, including rising inflation and the real estate bubble — situations that are bound to unnerve many Chinese and Communist Party that has ruled them with an iron fist since 1949.
China already has the Golden Shield Project, described by experts as “The Great Firewall of China,” to scrub the web of any information that China’s rulers would prefer that its people don’t see. Chinese censors often target Google since it’s an American company.
Chinese authorities recently blocked access to the company’s Gmail service after months of disruptions. Heading into the 25th anniversary of the deadly Tiananmen Square crackdown, Beijing made Google services “inaccessible” to Chinese users. Google will be China’s go-to target for censors as worries about a slowdown there continue to mount.
Not surprisingly, Google’s China business isn’t particularly robust. One market researcher pegs its market share at 3%, losing out to homegrown players including Baidu Inc (ADR) (BIDU) and 360 Search. If GOOG can somehow figure out how to double its share in China, that would generate huge profits for Google, which gets more than half of its revenue in the U.S.
Even a 10%-20% gain would be welcome for shareholders of Google stock.
Though getting a “China bump” isn’t going to be easy, GOOG is going to come under increasing pressure from Wall Street to bolster its business in the world’s most populous country. The reason is simple: Rival Facebook Inc (FB), which has been banned in China since 2009, is stepping up efforts to gain entry into the market.
If Facebook can get a toehold in China, that’s potentially bad news for Google, which will increasingly find itself at odds with Chinese authorities eager to prevent the dissemination of information they don’t want their citizens to read.
Google stock has slumped about 5% in the last year as the search engine giant disappointed Wall Street with a slowdown in paid clicks and rising capital expenditures that dented the company’s returns. Ad rates are plummeting thanks to the rise of automatic auctions known as programmatic buying.
Wall Street thinks Google stock has more room to run. The average 52-week price target on Google stock is $637.50, roughly 26% above where it recently traded.
Given the headwinds around Google stock, including China, I am staying on the sidelines for now.
As of this writing, Jonathan Berr holds no positions in any of the aforementioned stocks.
