Last Thursday, Janco Partners initiated coverage on Google (Nasdaq: GOOG ) with a "sell" rating. Is this a case of sour grapes? Frankly, who cares? But I am baffled by the arguments the analyst put forth. So let's break it down.
A "sell" rating issued with a target price of $76 per share.
Frankly, I have no argument here because I can't. I have no idea how much Google is worth.
Strategically positioned well
The analyst also said there were significant barriers to enter into the search technology space. I agree with this. Google certainly has a great search product that generates significant revenues. It's a very valuable asset. And to keep it valuable, Google is committed to maintaining its technical superiority as well as strengthening its brand name. Recently I wrote about four ways to create value, and Google seems to understand them perfectly.
I have said it before, and I will say it again. I define competitive advantage as a unique position with the right supporting capabilities. Google has a unique search technology and a great team of researchers who look to keep it as the leading search engine. Sounds like a competitive advantage to me, and I think the outstanding revenue growth backs me up.
Google needs to diversify its revenue base
Okay, you lost me with this one. If you say Google is well positioned strategically, why diversify? That sounds like a surefire way to reduce returns on invested capital and destroy value, not create it. It draws resources away from their strengths and prevents them from strengthening their capabilities. Google needs to find the best ways to invest the pile of cash from the IPO, and "diworsification" is not the right way to do it.
Become more like a portal
If Google is positioned so well and has a competitive advantage, why would it want to compete the same way that Yahoo! (Nasdaq: YHOO ) does? Competing like a portal is not Google's specialty, and in doing so, it would forgo its unique position.
There are three other problems with portals. First, there's history. General Electric (NYSE: GE ) brought NBCi public as a portal and then brought it back inside when it did not look like it was going to survive on its own. Does anyone remember Excite, Lycos, or Altavista? Remember when Disney (NYSE: DIS ) bought Infoseek and turned it into Go.com? These are not exactly success stories in my opinion.
Second, I seem to remember a few lectures in my economics class that said lots of competitors bring down the value of the pie that can be captured. AOL from Time Warner (NYSE: TWX ) is a portal. Microsoft (Nasdaq: MSFT ) has MSN. And of course there's Yahoo! Why would Google want to compete with these companies on their turf? It's like picking a fight with a bully in his neighborhood. You're asking for trouble.
And most importantly, portals run the risk of disintermediation. Remember portals act as intermediaries between two parties, usually buyers and sellers. What if buyers and sellers cut the middleman out? Or even worse, what if portals compete away returns by lowering prices that bring buyers and sellers together? Everyone but the middleman benefits in the last scenario.
The analyst can say whatever he wants about Google's stock price. But the analyst should check his logic before saying Google has a competitive advantage and yet should change its spots to look like everyone else in the fray.
Fool contributor David Meier, for some reason, is very loyal to Yahoo! and rarely uses Google. He does not own shares in any of the companies mentioned.