On the surface, General Electric and Google seem to have little in common. The former manufactures physical machines and engines while the latter dominates the virtual realm of high technology. In many respects, however, GE and Google share a similar story of rapid innovation, albeit during two different eras.
Up until recently, they also happened to occupy a place in my portfolio. After evaluating the future prospects of both companies, there's one that seems to hold more promise from my perspective. Here's why.
How to get big in America
If GE was the icon of the American industrial economy, Google is surely its post-industrial equivalent. The search engine giant, in so many ways, ushered in the age of an information-driven Silicon Valley. Much like the GE of the 20th century, Google has become a hub for innovation, spreading itself across multiple industries that all share a single commonality. In GE's time, that common theme was electricity. Today, it's data.
That recipe for success -- delivering electricity and data to the tools we use on a daily basis -- has produced similar results. GE and Google have prospered for years on end, and their market capitalizations now place them among the top five largest companies in America.
It's for this reason -- their massive size -- that I recently reevaluated GE and Google's place in my rather concentrated portfolio. While each delivers a different profile in terms of industry, business model, and growth, there's no question that the two blue chips increasingly face the law of large numbers. Further, as an investor with several decades before retirement, I tend to look for stocks with a little more room to run.
With that in mind, I assessed the upside potential of GE and Google's stock by evaluating the following three characteristics at each company.
The durability of an economic moat
If you consider four key pillars of an economic moat -- scale, network effects, intellectual property rights, and high switching costs -- it's hard to argue that both Google and GE don't possess all of them to some degree. Both companies offer efficiency that smaller competitors can't replicate, benefit from a higher install base of their products, possess incredible brands, and gain from high hurdles that customers face when contemplating a new provider for everything from jet engines to smartphones.
On the whole, however, I believe GE's moat is wider because of long-established economies of scale and switching costs in its respective industries. To an extent, Google trumps GE in terms of network effect because the expansion of its information empire is truly at the core of its industry advantage, but GE is also making inroads here with the advent of the industrial Internet. In this category, I concluded that GE's fortress looked more secure relative to Google's, and that's in large part because of the "only the paranoid survive" nature of the tech industry today.
The promise of "moon shot" bets
Google's CEO Larry Page may have popularized the term "moon shots" last year, but both GE and Google have been placing strategic long-term bets throughout their entire existence. At Google, the experiments include everything from driverless cars to Google glasses, whereas GE's most forward-thinking investments of late include 3-D printing and the industrial Internet.
Comparing these two innovative powerhouses head to head proved difficult. At GE, it seems the likelihood of success for its investments is higher, but the payoff might be smaller, while the reverse seems to be true for Google. Whenever you create an entirely new concept, the upside is bound to be massive if things work out, but I tend to favor the iteration on an existing concept approach. After all, Google didn't invent the search engine, it just optimized it in a new way.
With this in mind, I lean toward GE's "moon shot" bets when it comes to near-term, tangible potential. Right now, it's hard to see what the future looks like through a pair of Google glasses, or whether the timing is right for driverless cars. Of course, both companies have a wealth of other investments, but GE's biggest bets seem to be on the cusp of really taking off.
Emerging operational trends
From a growth perspective alone, Google would win hands-down versus GE. The former's three-year average revenue growth rate is 27% trumps GE's paltry -1% rate. However, Google's facing a trend of shrinking margins at the moment that was expected and practically inevitable. When you produce net margins that hover around 30% for several years, those flush times are bound to come to an end. Google's operating and net margins have dipped by 12 percentage points and 7.5 percentage points, respectively, since 2010.
GE, meanwhile, could be entering more lucrative and margin-enhancing markets. Its full-on embrace of the software and data movement resembles Google's, but in a manufacturing rather than a consumer setting. Directionally speaking, I like GE's prospects in layering software on hard goods versus the increasingly competitive margin environment in Google's core markets.
Shares in GE and Google can offer different things to different investors. Google's a growth-machine, whereas GE has an impressive dividend legacy. At the same time, both companies boast top-rate management teams, a wealth of cutting-edge products, and an entrepreneurial, yet focused, company culture. The future, on the whole, looks promising for either company.
As of now, however, I believe GE's built a formidable position in a manufacturing industry that's about to take off because of high-tech investments. It's an enviable position to be in, and one that makes GE more attractive at 17 times earnings relative to Google's prospects at 32 times earnings. If GE has half the success Google's had at harnessing the power of the Internet, its stock has plenty of runway ahead.