Google, Gap, and the Greater Good

Two publicly traded companies shook things up on the competitive landscape this week -- in a positive way. Google's (NASDAQ: GOOGL  ) said it is making plans to expand Google Fiber super high-speed Internet service to 34 cities from three. Gap  (NYSE: GPS  ) , meanwhile, is voluntarily giving its employees raises. These seemingly divergent headlines from very different companies have a similar big-picture benefit: long-term growth potential for investors and the economy at large.

Popularity potential
The Google Fiber announcement came in tandem with some uninspiring merger and acquisition news. Many people -- including the companies' customers -- are groaning about Comcast's (NASDAQ: CMCSA  ) plan to acquire Time Warner Cable (NYSE: TWC  ) . High-speed Internet providers such as Comcast, Time Warner Cable, and Verizon (NYSE: VZ  ) tend to be unpopular with consumers.

The American Customer Satisfaction Index has ranked both Comcast and Time Warner as the worst in customer satisfaction. Merging two entrenched, unpopular old-school companies sounds, well, not only unimaginative (for those who play investing-speak bingo, the word "synergies" is included in Time Warner Cable's press release) but ugly in quite a few different ways.

Here's capitalism not working as it should -- heavy lobbying and regulatory issues haven't exactly improved the situation. Many consumers end up choosing "the lesser of two evils" when they sign up for high-speed Internet service, because they have very few better choices. Maybe these are not literally considered "monopolies," but they've felt that way for years. (The Comcast/Time Warner deal is threatened by antitrust concerns, though.)

Google Fiber is sure to cost a heck of a lot of money. However, it will offer cheaper, better Internet service. Download speeds of one-gigabyte per second blow away our entrenched dinosaur friends. Google has a history of tearing up assumptions about how established thresholds should work. Remember Gmail's launch?

The beauty of it is that this is good for consumers and it's good for Google's business. Offering better service isn't purely altruistic. Google's business depends on Internet traffic and speed, the faster the better. That's why big investments in long-term initiatives make sense, particularly for a company with a lot of cash. It's a win-win.

Meanwhile, speaking of winning (or losing), this move may very well force behemoths like Comcast, Time Warner, and Verizon to improve their actual performance -- or suffer. Google's move isn't strange, it's brilliant.

Gap's ahead of the curve
In more breaking news, Gap (NYSE: GPS  ) just underlined exactly how businesses should work. It has voluntarily chosen to give employees raises well above the current minimum wage threshold -- without being ordered to do so by the government. Gap will up its minimum wage to $9 per hour this year, and then to $10 next year, which will increase pay for 65,000 employees.

Even more interesting, this helps raise the bar in retail, where companies including Wal-Mart (NYSE: WMT  ) and McDonald's (NYSE: MCD  ) have been scorched with negative press about employee treatment.

According to Bloomberg, although Wal-Mart has an official "neutral" stance on the minimum wage debate, it's weighing the idea that there is opportunity on the issue. Meanwhile, another real point that investors really should ponder: Wal-Mart is taking some financial hits from food stamp cuts; these are constraining its own customers. That's hurting business, not just PR.

Innovate to growth
These moves make both Google and Gap solid stock ideas.

Google is renowned for treating its employees well. The tech behemoth is cash rich and powerful enough to embark on a dizzying number of innovative product ideas, including self-driving cars and Google Glass.

However, Google Fiber could be a doorway to a new, common-sense revenue channel. A strategy with a fresh, new "wow" factor is reminiscent of situations like Netflix (NASDAQ: NFLX  ) versus Blockbuster.

Obviously, Google's policies regarding good employee treatment and an emphasis on green business have ruined it an investment, right? Actually, the tech giant has poked a hole in the conventional wisdom to which many investors cling. It's hard to find a company this profitable. Google earned $36 per share last year. There's the magic word -- profit.

Right now, Google is trading at 20 times forward earnings. Microsoft (NASDAQ: MSFT  ) trades at a mere 13 times forward earnings, but what about its profitability? In the last 12 months, it has earned $2.70 per share. I think I'm more enamored of Google at its current price.

Gap already has some impressive responsible initiatives behind the scenes, but its business hasn't attracted my attention for a long time.

However, it's worth putting Gap back on the retail radar. The company is trading at 14 times forward earnings, a tad cheaper than retail rivals such as Abercombie & Fitch (NYSE: ANF  ) (a forward price-to-earnings ratio of 15) and Urban Outfitters (NASDAQ: URBN  ) (forward P/E of 17).

A little extra sheen to Gap's brand gives a pretty major reason to reassess it as a stock idea.

Intangible assets, tangible gains
Positive employee morale is an intangible but essential asset. Delighting and attracting loyal customers as a result of more engaged employees and better product offerings is a solidly useful "byproduct," too.

Economic ripple effects from big-picture moves like these can touch Americans in myriad ways. These can spur economic improvement, competition, and strength the old-fashioned way -- truly responsible business practices that instigate healthy rivalry that floats business up from the bottom.

Good businesses are setting themselves up to win and win big, instead of losing in the marketplace. Welcome to the awakenings of races to the top, not the bottom, and a place where stakeholders, including shareholders, can generate positive growth in more bottom lines than one.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


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  • Report this Comment On February 26, 2014, at 1:30 PM, HoosierRube wrote:

    Where do you even start with this stuff?

    Lets take the easy ones;

    1.Here's capitalism not working as it should -- heavy lobbying and regulatory issues haven't exactly improved the situation.

    Capitalism is a right, not an economic system per say. The system is the natural extension of the RIGHT for any two people to come together and reach a mutually beneficial deal.

    Capitalism is NOT government control that is via the bribery of politicians and the enactment of regulations born of corrupt governments. And as sure as I'm sitting here, all governments become corrupt when you give them the power to control and regulate.

    In fact, this ill conceived statement is a downright condemnation of government control. And that's when two people do not have the right to come to an agreement between themselves because the government will make those decisions for them.

    2. Obviously, Google's policies regarding good employee treatment and an emphasis on green business have ruined it an investment, right?

    Lets not over think this one, but lets make a simple comparison of Google and the much hated Walmart.

    Profit Margin Google: 21.6%

    Profit Margin Evil Walmart: 3.62%

    Combine that with another author contrived argument;

    3. issue. Meanwhile, another real point that investors really should ponder: Wal-Mart is taking some financial hits from food stamp cuts; these are constraining its own customers.

    So, if Walmart ups their margins to 21.6%, how does that serve these people that depend on Walmart for some ot the basic necessities of life?

    Do you just expect them to pay an additional 17% and just shut the heck up?

    Why oh why do the self-righteous among us continue to harm the poor?

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