This week and next, we're presenting 10 core stock ideas -- stocks our writers believe can serve as the foundation for a long-term-focused portfolio

The next time someone tries to tell you that search is a wide-open business and that the tools we use today will be dead and buried within a few years, do this:


That's right, blink. Then say, "Google just performed 3,832 searches. Yahoo! performed 994, and Bing performed 639." That's what a market mammoth looks like when you break it down to its atomic parts.

On a bigger scale, here's what the business looks like:

Company Name & Ticker

Google (Nasdaq: GOOG)

What it does

Google is the search engine market leader, owner of YouTube, and an increasingly popular deliverer of cloud-computing software.

Recent price


Market cap

$153.2 billion

Forward P/E (next 12 months)


Return on equity


Source: Capital IQ, a division of Standard & Poor's. Data current as of Sept. 15.

The business
Google is search, and search is Google. All told, it's a business that collects more than $26 billion in revenue annually. Most of that from a simple, clean, white Web page with a box where you and I enter phrases and questions -- 3,832 questions and phrases every second, to be specific.

Except it isn't that simple. See, the way Big G defines search is very different from how you define search. To Google, every piece of data that exists has to be categorized and indexed in some way. A Gmail label is a search string; it's a way of categorizing an email in your inbox. But don't take my word for it. See for yourself:

Each Google product is built on search in some meaningful way. Consider:

  • Every YouTube playlist is a search string.
  • Your Google Buzz feed is the result of searching the posts of those you follow.
  • Each iGoogle page is fed by multiple searches for certain types of data (e.g., your email, your video playlists, your places, companies you follow, and so on).
  • Every spreadsheet, doodle, presentation, and document in Google Docs is indexed so that it can be accessed from anywhere on the Web. How? Using search.

The Web doesn't work without search, which means it doesn't work without Google.

Why it's a core stock
Competitors would say that's ludicrous, but ask yourself: How many have tried and failed to overcome Google's search lead? Even technophobes Warren Buffett and Charlie Munger see how wide Big G's moat is.

Then again, it's difficult to miss the numbers. Combined, Yahoo! (Nasdaq: YHOO) and Microsoft (Nasdaq: MSFT) still account for less than half the searches Google does. barely registers anymore, and AOL (NYSE: AOL) is becoming a content company -- more a competitor to Google News than Google search.

Even in China, where Baidu (Nasdaq: BIDU) rules, the possibility of Google stopping work on indexing the contents of the Sino superpower's portion of the Web gave pause to regulators there. The Big G is that important.

Google is also a fierce competitor that has perfected the art of fast and cheap failure. You know the list of failed projects. Dodgeball (supplanted by Foursquare), Google Notebook (supplanted by Evernote), Jaiku (supplanted by Twitter), and Google Video (replaced by YouTube). How many of these failures have materially affected Google's earnings and cash flow? How about zero? Over the past two years:

  • Revenue is up an average of 15.6% a year.
  • Normalized earnings have improved by an average of 22.2% annually.
  • Free cash flow is up more than 150% annually.
  • And the stock is up -- wait for it -- 9%. Nine freaking percent.

No way is that fair. Assuming a discount rate of 10.5%, Google today is valued as if it'll never achieve better than 3% cash flow growth from here till eternity. The odds of that coming true? My imaginary cat has a better chance of winning a barking contest.

But Google isn't without risks. For as much as the Big G seems to have perfected text-based search, it has no answer for the sort of social search that Facebook and Twitter supply. Not yet, anyway. (On Wednesday night, CEO Eric Schmidt confirmed in media reports that a social search project called Google Me could debut this fall.)

Connectivity is also an issue. Anything that gets in the way of Google getting in front of users is a problem in that it would prevent the company from collecting the data it needs to present you with meaningful, revenue-generating ads. This is why Android is so important, and why Apple (Nasdaq: AAPL) and its iPhone and iPad are so dangerous.

In sum
Even so, there's a lot to like about Google at these levels. The stock is cheap, the moat is wide and defensible, and search technology is critical for cloud computing. This stock is as close to a no-brainer as there is in the world of investing.

Now it's your turn to weigh in. Would you buy Google? Would you short it? Let the debate begin in the comments box below.