Why Is Google Such a Bad Investor?

According to the TechCrunch blog, Google (Nasdaq: GOOG  ) has invested between $100 million and $200 million in FarmVille parent Zynga. Let's hope that this growth effort doesn't wither on the vine, like so many of the search giant's prior purchases.

The Zynga investment may prove a shrewd move on Google's part, especially as it ramps up its hiring efforts for an online gaming division. Zynga's support for smartphones powered by Google's Android should also grow dramatically with Big G as a minority investor.

TechCrunch's sources also paint a glowing picture of Zynga, projecting at least $1 billion in revenue next year, with healthy margins to boot. However, I also keep thinking back to a report by gaming blog Kotaku two months ago, indicating that Zynga may have jumped the shark. It detailed how Zynga was losing millions of active users in May, after Facebook blocked its ability to use notifications and gift requests.

Zynga has rightfully expanded its efforts outside of the leading social-networking site, but isn't the realm of casual and social app-gaming getting awfully crowded these days? Even Viacom (NYSE: VIA  ) and Disney (NYSE: DIS  ) have followed Electronic Arts (Nasdaq: ERTS  ) in making social gaming acquisitions recently.

Google may also face an uphill challenge in swaying developers to embrace its different platforms, now that it's an interested cheerleader with a stake in Zynga. 

Despite some notable exceptions, Google has made several lousy investments in the past:

  • It forked over $1 billion for a 5% stake in AOL (NYSE: AOL  ) , dumping the shares a few years later when AOL was worth significantly less.
  • Google struck a deal that could have originally been worth as much as $1.2 billion over three years in incentives for radio advertising specialist dMarc. That real-world expansion didn't exactly pan out, either.

Google also has a bad habit of betting on the wrong horse. It acquired microblogging site Jaiku instead of saving up for Twitter. It launched social networking site Orkut instead of eventually hopping aboard News Corp.'s (NYSE: NWS  ) MySpace or Facebook. It bought -- and subsequently shuttered -- Dodgeball instead of pairing up with Foursquare.

Yes, Google did wager wisely on YouTube. DoubleClick should be another winner. However, investors should wait and see whether the dot-com rock star can prove itself equally worthy in social gaming.

What are your favorite or least favorite Google acquisitions? Share your thoughts in the comment box below.

Walt Disney is a Motley Fool Inside Value selection. Google is a Motley Fool Rule Breakers pick. Walt Disney and Electronic Arts are Motley Fool Stock Advisor recommendations. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz still uses Google a lot in his daily life. He does not own shares in any of the companies in this story, except for Disney. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On July 12, 2010, at 4:22 PM, msaltzny wrote:

    Maybe they've become so large and profitable that they are somewhat careless when making purchasing decisions. Is it purely coincidental that their "arch" rival, Microsoft, doesn't have the greatest track record when it comes to acquisitions either? Maybe its just that when the company is so profitable it is looking for other things that may wind up adding to the bottom line eventually but not in the near term. Or, maybe, they feel they can afford to make a lot of mistakes now that they are so successful. In the long run it isn't any wiser for them any more than it has been for Microsoft.

  • Report this Comment On July 12, 2010, at 5:22 PM, JJKOOLKID wrote:

    Interesting article. But the author missed the boat with the "Dodgeball...Foursquare" comment.

    Google's VC firm (appropriately named "Google Ventures") invested a 4 million dollar stake into SCVNGR, who is swiftly becoming a major player in the "location-based social gaming" scene.

    Foursquare currently has more users, but SCVNGR has a substantially larger client list (Warner Bros, NY Times, Celtics, Patriots, Etc.), a deeper game involving "challenges" and has been cash-flow positive for over 6 months.

    I think Google backed the right horse on this one.

  • Report this Comment On July 13, 2010, at 9:01 AM, Gregeph wrote:

    I think you raise a legitimate question about Google's investment skill. They enjoy a strong competitive advantage in search and could squander a lot of capital if they pursue investments where they do not have an edge. Nevertheless, the stock is attractively valued based on the core search business. The stock is at $476 and has $82/share in cash on the books so you're only paying $394 a share. Consensus earning for 2011 are just under $32 a share. Just over 12x 2011 earnings seems cheap for a company that has a near monopoly in search and is growing market share. It is growing globally and should continue to benefit from further penetration of the Internet in the developing world. You get the other business units - mobile search, better monetization of Youtube, cloud computing, Google TV, etc. - for free and they have consider optionality value. http://gregspeicher.com/

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