No one likes to feel left out, but no one likes being late to a party. With as much as Google (Nasdaq: GOOG ) has accomplished, is it too late to consider buying in? Or is it too late because this ship has already sailed?
Is Google a buy, sell, or hold?
- Moat: Big G's moat-building prowess is unmatched. I can't think of any other company that has built such a wide and compelling moat. Virtually every single product or service Google offers is 100% free for users, which is a pretty tough price for rivals to beat. The more time users spend using Google's gigs, the more time Google can spend showing us targeted ads and raking in advertising dollars.
Open-source Android is free for OEM hardware makers to infuse onto devices, and Android's market share tops Apple (Nasdaq: AAPL ) iOS. Its Chrome browser is quickly bringing Microsoft (Nasdaq: MSFT ) Internet Explorer to its knees. Google Docs and Apps also threaten Microsoft's staple Office suite by providing a free cloud-based alternative for businesses. Popular Gmail is even threatening Microsoft Exchange. These are but a small taste of how Google disrupts with free goodness, and the company is able to tie it all back to its core search and advertising business.
The moat is so impeccable that even Warren Buffett and sidekick Charlie Munger, two legendary investors who don't hide their aversion to technology companies, give it a standing ovation.
- Ubiquity: Google is everywhere. The company's infiltration into our minds is so profound that we've even transformed its name into a verb in modern parlance. "Google" has now become slang for "search," which is interesting because people usually adopt colloquialisms to lazily cut down how many syllables they need to say. Not once have I heard a friend ask me to "Bing" the meaning of something or "Yahoo!" (Nasdaq: YHOO ) the answer to a friendly dispute. That prevalence is what makes Google's brand so irreplaceable, and it also speaks to the strength of its moat. It's also why calling Baidu (Nasdaq: BIDU ) the "Google of China" or Yandex (Nasdaq: YNDX ) the "Google of Russia" is a compliment.
- Scattershot: One of Google's criticisms is its scattershot approach to new projects and acquisitions. The company likes to throw three handfuls of ideas at the wall and see if half of them stick. Big G's culture of experimentation can lead to some moat-worthy ideas, but it can also be a liability if none of them pans out after sinking R&D dollars into them. These projects undoubtedly contributed to Google's 41% jump in R&D expenses last quarter, outpacing the 33% increase in top-line revenue.
Since just about everything Google offers is free, it also makes it challenging to gauge a project's success or failure. They're typically not monetized directly, so each project's value must be framed in its ability to indirectly tie users back into search and advertising, which is harder to quantify.
- Facebook: Netizens are spending increasing chunks of their time idly browsing Facebook. That's time not being spent with Google and advertising dollars that are starting to flow toward the social-networking kingpin. Google+ is the official response, but its reception has been tepid at best.
Social-media darlings like Facebook, Twitter, and LinkedIn (NYSE: LNKD ) are moving up the traffic scale, and Facebook even has ties with Bing to power Web searches through its search box. Microsoft is even working on its own social network with heavy Bing integration. Being a common disruptor doesn't make one invulnerable to being disrupted, and since Google's core business particularly concentrated, it can be susceptible to disruption.
- Antitrust: Because of its dominance and ubiquity, Google is no stranger to antitrust scrutiny from regulators stateside and abroad. Its search-market share of roughly 65% drew regulator attention long before even the proposed acquisition of Motorola Mobility (NYSE: MMI ) , which adds a whole new layer to the Federal Trade Commission's existing probe. On its current trajectory, Google runs the risk of becoming the next Microsoft, which Steve Jobs even warned CEO Larry Page of if he didn't focus the company on its core offerings.
It's not too late; Google is still a buy. Google has positioned itself as an irreplaceable force within the Internet. While its broad approach to experimentation has certain risks, it has reaped plenty of rewards from the strategy. The rewards may be harder to quantify, but their moat-building effects on top-line revenue speak for themselves.
Facebook is a competitive threat to an extent in winning some advertising dollars, but I'd wager that virtually no one searches through Bing-powered Facebook. It's an extra and superfluous step to navigate to Facebook to execute a query when Chrome's "Omnibar" is a one-stop shop.
Google has plenty of upside from here.
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