As portfolio manager of Tier 1 Investments, a Motley Fool Real-Money Portfolio, I seek out and invest in elite businesses. These include companies with the strongest competitive advantages, largest growth opportunities, and best management. I call these businesses "Tier 1 enterprises," and the 11 businesses that currently comprise the portfolio have helped Tier 1 earn a 70.97% time-weighted return since inception, compared with the S&P 500's return of 56.61%. But once I build an ownership stake in a business, it's not simply set and forget. I constantly monitor changing industry dynamics in search of threats that can erode the competitive advantages of the companies in my portfolio.
Google (GOOGL -1.23%) is currently my largest position in Tier 1, comprising more than 20% of the portfolio. As I see it, here are three of the major threats that Google is facing today.
The Amazon threat
Google makes the great majority of its revenue from connecting businesses with consumers that are searching for products and services to buy. So what happens when these consumers begin to search for those products on Amazon.com (AMZN -2.56%) instead? Thanks to its wide selection of goods, low prices, and excellent customer service, Amazon has become the first and last place that many consumers shop online. Google has taken steps to combat this trend with its product listing ads. These ads appear as a set of product photos with prices and links near the top of Google's search result pages, and also push Amazon's regular search results further down the page -- making them less likely to be clicked. In addition, if these ads increase the convenience of searching for items on Google, it could reverse the tide of people going directly to Amazon.com.
The Apple threat
Android has the dominant share of the smartphone market, with some estimates placing it at more than 80%. Android is also steadily gaining share in the tablet space, with some research firms projecting its share to reach 65% of all tablets to be shipped in 2014. However, Apple (AAPL -1.22%) leads Google by a significant margin in the area that matters most of all: profit share. But Google is improving its monetization of its Android ecosystem; revenue in Google's digital apps and content business surged 85% to $1.2 billion in the third quarter. If Google can maintain its unit share lead in smartphones and claim the lead in tablets, its share of these industries' profits should continue to grow.
Google is also battling Apple in the productivity software arena. Apple recently made its iWork suite of productivity apps free to existing users and new owners of its devices. Many have seen this as an aggressive move by Apple to slow the growing popularity of Google Docs. But Apple's software is only available on Apple devices, whereas Google's applications are available on Windows-powered PCs, Macs, and Google's own Chromebooks. That's a powerful advantage that should continue to serve Google well.
The social-media threat
Much has been made of the dangers that Facebook's (META -4.13%) surging growth in active users -- now more than 1 billion people globally -- poses to Google's search business. That's because Facebook blocks Google from indexing its data and making it available in its search results. And Facebook's users generate an incredible amount of valuable data to which advertisers crave access, as those billion-plus users basically tell Facebook what they "like" on an almost daily basis. But Google has built its own social-media platform, Google+, to be a "social layer" that enhances many of its online services and helps Google obtain the type of personalized data that Facebook possesses. Currently, no other company matches Google's data collection abilities, with its dominant positions in desktop and mobile search, Internet browsers (via Chrome), and email (via Gmail), among other services. This creates a powerful virtuous cycle in which the data Google collects allows advertisers to better target their ads, making them willing to buy more ads from Google, which generates more cash flow that Google can reinvest in improving its services and expanding its ecosystem, which in turn collect more data ... and the cycle continues. So while Facebook and other social-media platforms are a threat to Google, the search titan has a wide moat protecting its core advertising business that its competitors will find difficult to breach.
The Foolish bottom line
If Google fails to properly address any of these threats, it could get passed up by the competition. And taken together, these three threats could crush the search king. But for the reasons I've outlined in this article, I believe Google is well positioned to meet these challenges head on and, in many cases, win. As such, Google will remain my largest position in Tier 1 for the foreseeable future.
Next steps
I've built Tier 1 to be a highly focused portfolio based upon the philosophy of legendary investor Warren Buffett, who made billions by isolating his best few ideas, betting big, and riding them to riches. I've certainly bet big on Google, but if you'd like to learn about a company that is not yet in Tier 1 that I have squarely in my crosshairs as a potential new addition, click here to watch this jaw-dropping investor alert video. Inside, you'll find out why The Motley Fool's chief technology officer is putting $117,238 of his own money on the table, and why he's so confident this stock will be a huge winner in the years ahead. Just click here to watch -- this video is available free of charge today, but it won't be forever.
