This article is part of our Rising Star Portfolios series.
Any portfolio focused on long-term excellence (as this one is) needs exposure to the great and powerful trends that will affect all us earthlings for decades to come. Google (Nasdaq: GOOG ) can get you just such exposure.
This $200 billion large cap is not only your best play on the incredible growth of all things online; it's also trading at a very fair price these days. Thus, I feel it's a great time to load up on a full position of one of the most interesting companies in the world.
The business of free
Most people are pretty well-versed on what Google actually does, but I think far fewer realize the consequences of its business and how it all fits in with the grand scheme of things.
I could (and heck, I will ... just give me a second) give you a long list of applications the company has produced, but here's the short story: Google disrupts dozens of industries by providing incredibly rich, useful, and valuable applications, all for free. Doing this accomplishes what management is really after: getting more people online and causing more people to spend more time online. As this online usage grows, so grows the advertising revenue that is the core of Google's business.
In his book Free: The Future of a Radical Price, Chris Anderson describes very well the mind-set inside Google's headquarters, and here's how I imagine it all goes down: Applications are developed not by MBAs who ask, "Which products can make lots of money for us?" but by engineers who ask, "Which products will people find incredibly useful?" The ability to develop software completely unfettered from profit expectations is a huge advantage over companies that have to keep from disrupting their own revenue streams. Make international phone calls for as little as two cents per minute? Sure. Digitize every book in the world and place them online? Of course!
Thus, you and I have free Gmail for our email needs, the Picasa photo album and editing program, Google documents, the Chrome web browser, Google Maps, Google Earth, Google+, and, of course, Internet searches that return hundreds of thousands of results in 0.13 seconds. Or how about Google Maps Navigation, which provides Android smartphone users a powerful and free GPS navigation program? Ah yes, and that Android operating system is provided free to smartphone manufacturers, simply to help sell more phones so more people will conduct more mobile searches.
Google's growth seems to be limited only by the growth of the Web. As Anderson says, a variation of Moore's Law -- a doubling of processing power every two years that drives down cost relative to performance -- is helping drive incredible advances in technology whereby the costs of processing, Internet bandwidth, and data storage are moving toward zero.
These advances have made cloud computing a reality already and will allow for future applications we can't even dream of yet, driving web usage higher and higher. I see no way that this acceleration won't continue for decades. Google will be there all the while, collecting a toll of sorts with its highly targeted web advertising.
Virtually all of its revenue is linked to advertising. While there's growth to be had as Web usage expands, management is also expanding the online ad market itself by becoming more efficient in connecting advertisers with people who actually care about their products -- and thus prompting advertisers to pay higher rates for that highly coveted audience.
The downside may seem limited, but Google -- the Great Disruptor -- could get disrupted itself. I can't really picture how that would happen, but then, who can ever envision how an industry will be disrupted? A great example is how Microsoft's (Nasdaq: MSFT ) Encarta software disrupted the business of physical encyclopedias -- and then Wikipedia disrupted Encarta.
Google has been a thorn in the side of some extremely smart and well-financed companies, and they'd all love revenge. Microsoft in online search. Yahoo! (Nasdaq: YHOO ) in display ads. Social network sites like Facebook and LinkedIn (NYSE: LNKD ) . Apple (Nasdaq: AAPL ) , of course, with its iPhone and iOS operating system. They all have a lot they could lose to Google, and all will battle hard to stay relevant.
Finally, Google seems to have a reputation of being constantly overpriced. I don't think that's the case, obviously, but given that stigma, if we double-dip downward into another recession ad rates will fall again and so will Google's price -- which dropped 60% during 2008's swoon.
The price tag: Not free
Google as a business is in great shape: $35 billion in net cash, 27% net margin, and returns on equity in the 20% range. It's also 20% owned by insiders, which I like to see.
But what about valuation? It's trading at about 17 times estimated full-year earnings and 14.5 times 2012 estimates. Analysts see average growth of 19% over the next five years, so I can't even bring out my usual line about this stock being overpriced "by traditional measures," because it's not.
What's more, I think it will grow a bit faster for a lot longer than what's priced in, simply because of the long-term trends I mentioned above.
Tomorrow, this portfolio will load up on a full position, or about 5% of the total money I'm receiving this first year. I encourage you to follow along, especially if you're looking for an internationally diversified large cap and want to make sure you're invested in the long-term growth of the great information explosion.
This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. Click here to see all of our Rising Star analysts (and their portfolios).