The Best Stocks for 2010: Google

Google (NASDAQ:GOOG) gets a bad rap. Too many of us wonder how a search engine -- a search engine! -- could be worth almost $200 billion in market cap. The bears call this valuation crazy, a fad, unsustainable. The bears are wrong.

A short history of why you hate Google
"My thoughts ... watch for the next big thing in search engines to pop up," wrote CAPS investor agco2323 earlier this month. "[Remember] that all big recessions bring on new companies that will change things to come; including the way we use the Internet."

That's fair. One of the great rules of tech is that there are no rules. Incumbents go almost as fast as they arrive. Still, we need to be clear about what Google is, and what it isn't.

Google is not a search engine. Yes, that's what you see when you arrive at the home page. Search technology is The Big G's source of growth, and a source of frustration for Microsoft (NASDAQ:MSFT) and Yahoo! (NASDAQ:YHOO), but classifying Google as a pure reflection of its primary innovation misses the point.

Google is the world's largest collector, distributor, and host of Web-based information.

What that means
Practically, this means Google is in the business of everything having to do with the Web and the stuff that connects to it. Alan Eustace, one of the company's senior vice presidents for engineering and research, describes this truism best in a recent interview with Forbes India. "We are not an incremental company," Eustace said.

This should tell you that, regardless of its size, influence, and market cap, Google is nowhere close to being a mature business. When the Web matures, so will Google.

The Web isn't mature. If anything, it's still a fast-growing preschooler. Consider the anecdotal evidence. Nielsen reports that during the third quarter, consumers spent 35% more time watching video on the Web than they had a year ago. TV consumption fell slightly over the same period. Amazon.com (NASDAQ:AMZN) sold more Kindle books than physical books on Christmas Day. Downloaders indulge in more than 100,000 iPhone apps, and more than 17,000 Android apps.

Celebrate the digital thumb-suckers
At the same time, Web-dependent services continue to soil themselves occasionally. Twitter enthusiasts still endure the Fail Whale, and Google's Gmail has suffered more than a few high-profile outages.

But, again, this is a good thing. The Web's immaturity means that there will be more to collect, more to organize, and more to store. And that adds up to more digital real estate ripe for advertising.

Take your ads with you
Ads butter Google's bread via two primary platforms: AdWords, for pitches that appear on Google-owned sites, and AdSense, for pitches that appear on sites owned by someone else. The varying newspapers owned by New York Times (NYSE:NYT) are among The Big G's highest-profile AdSense clients.

To these two, we'll soon add a third platform: AdMob, a mobile advertising system that Google last month acquired for $750 million.

If reason No. 1 to buy Google is its ability to capture value from the general growth of the Web, reason No. 2 is AdMob. Advertising-supported location-based services are already The Next Big Thing.

Look at Twitter. The billion-dollar microblogger has added geolocation to its programming interface. Developers are now free to create software that knows where tweets hail from. Foursquare is one example. "Check in" at a favorite location, and you can ask the service to look up "nearby tweets."

Advertising conglomerates such as Omnicom (NYSE:OMC) and Interpublic Group (NYSE:IPG) must love this idea. Every tweet or check-in would create an opportunity to engage at the point of maximum effectiveness. For example, you might receive a pitch for $1 off a coffee when Twitter and Google Maps place you near a beanery.

Rule No. 1 of the New Web: location, location, location
Scenarios like these are why researchers Kelsey Group and eMarketer each project more than $3 billion in annual spending on mobile and local search advertising by 2013, up from less than $1 billion today. Who do you think will deliver most of those pitches? Google would be my guess.

I'm not the only one. The Federal Trade Commission has asked for more information before approving Google's deal for AdMob, and two separate consumer groups this week publicly voiced objections. Neither wants to see Google dominate the mobile ad market the way it does the search advertising market.

A not-so-big price for The Big G
It's too soon to know whether they'll get their wish. But with IDC estimating that Google and AdMob together would control 30%-40% of the mobile advertising market, I find it hard to imagine the FTC opposing the deal.

And if it does? The general-use Web should continue to supply more than enough growth to support Google's valuation. Here's why:

Sources: Capital IQ, Yahoo! Finance.

Put in this context, Google's price-to-earnings multiple appears to still be rebounding from unreasonable lows. Looking ahead, The Big G trades for just under 24 times next year's projected earnings. That's not cheap, but it's fair when per-share earnings are expected to rise 16%.

Of course, numbers are only part of Google's extraordinary stock story. As a shareholder, I believe it could change everything for my portfolio. And for yours, if you're willing to ignore the bears and buy.

Which is the best stock for 2010? See all 13 candidates here.