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3 Reasons to Believe This $400 Billion Company Is Built for the Long Haul

By Chad Henage - Feb 18, 2014 at 3:00PM

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Google generates tons of cash, spends on R&D to keep the business thriving, and just eliminated its worst-performing division.

When a company already carries a $400 billion market cap, there is a tendency for some investors to believe that it has already missed most of the gains. In the technology sector, this seems even more prevalent as companies from Cisco to Microsoft (MSFT -0.26%) to Dell have previously been market darlings, only to fall out of favor. In Google's (GOOGL -1.77%) case, however, there are several reasons to think this company can continue its performance well into the future.

Management is willing to admit its mistakes
In one of the more well-publicized events of the last few years, Google decided to acquire Motorola Mobility for approximately $12 billion in 2012. Some analysts immediately theorized that this was a huge play for the thousands of patents that Motorola held.

However, others suggested that this was a way for Google to compete directly with the likes of Apple (AAPL 0.88%) and Microsoft in both the smartphone and tablet arena.

In theory, part of the reason Apple has been successful with its iPhone and iPad business is because everything is designed by the same company. When you have control over both the hardware and the software, it's easier to ensure customers get the experience you expect.

In 2012, it's likely that Google thought it could build smartphones and tablets under the Motorola name, offering a superior experience while avoiding stepping on the toes of Android supporters like Samsung, LG, HTC, and others. After two years, nearly $2 billion in losses, and no significant wins for Motorola, Google management finally came to its senses.

Though the company sold the handset business to Lenovo for just $2.9 billion, Google maintains the lion's share of the patent portfolio, and is now able to move forward without this distraction. The fact that management can admit its mistakes and move on is just one reason this company looks built for the long haul.

Innovation isn't cheap
The second reason Google looks secure for the long term is the company's willingness to spend a significant amount on research and development to stay ahead of the game. In the most recent quarter, Google spent more than 12% of its revenue on R&D.

By comparison, Microsoft spent about 11% of its revenue on R&D, and Apple spent just over 2%. If investors want proof that R&D spending is critical, consider some of the recent events at each company.

Google reported that Google Sites revenue increased by 22% and paid clicks were up 31%. The company also reported near-100% growth in its "other" category, which includes Google Play. The changes made to the Google Play interface on both computers and smartphones has been nothing short of revolutionary in the last several years.

Microsoft, which also spends a lot on R&D, reported that its business cloud offerings saw double-digit growth. In addition, the company's Surface division reported that revenue nearly doubled over the holidays, while the Xbox One sold nearly 4 million consoles.

By comparison, Apple spent a measly 2% on R&D, and the iPhone saw one of its slowest year-over-year growth rates and iPad growth was less than some expected. Apple may be a great company, but since the introduction of the iPad in 2010, the company has yet to break into any new categories.

It seems clear that companies that spend a decent amount on R&D will benefit, and those that do not will suffer for it.

You can't fake cash
Last, Google's cash-generating performance indicates that the company is built for the long haul. While net income and even cash flow statements can be somewhat manipulated to display varying "results," the balance sheet cannot.

In the last year, Google's net cash and investments have increased 25%. While Apple's cash hoard is larger, the company's net cash and investment growth hasn't kept up with a 17% increase. Where Microsoft is concerned, the company's expenses related to new products and services have dampened the cash growth to a decline of nearly 2% year over year.

While it's true that both Apple and Microsoft are repurchasing shares, which affects their ability to grow cash balances, neither of these companies has the growth trajectory of Google. Even after a significant run, Google shares trade for just a modest premium to the company's expected growth rate.

Buying a company that can admit its mistakes, spends a lot on R&D, and generates huge amounts of cash could be a good way to build your own portfolio for the long haul, too.

 

Chad Henage owns shares of Apple, Cisco Systems, and Microsoft. The Motley Fool recommends Apple, Cisco Systems, and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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