Google; Buy, Hold or Sell?

As an old wisdom says: Do that what you are most good at and do not try to do too much of that what you are absolutely not good at. Being the techno-layman that I am, when posed the question would it be wise to invest in Google, I did not spent much time in trying to understand the details of their latest technological revelations such as Android, Chrome OS, Google Wave, Google moderator and so on. So in this blog-entry the answer will not be a story based on technological information.

Instead I went back to the basics, my basics. Whether or not to invest in a company can be brought back to the core by the following formula: Stock price = the NPV of the total future dividends or in more technical terms: Stock Price = Sum of Dividends (Div) in each Time (T) / (1 + R)^T. The question becomes clearer to me: does Google have the ability to keep making more money in the future? A few things pop-up like a sore thumb when reading analyst reports and media coverage on Google:

1) Google is increasingly being criticized on how they gather and store personal data. There have been several investigations in- and lawsuits against Google in this regard. There was the case concerning Google Street View, where the fam. Boring sued Google because they felt they invaded too far in the privacy of their home. Not to mention the case that came to light after a German investigation into the unauthorized collection of data from users of Public WIFI networks. And they face more problems in this area. According to Ari Levi in an article published in TheRecord.com of the 4th of April 2010 “In Europe, Google is under scrutiny for possible privacy, antitrust and intellectual property violations”.

2) Google has had problems in China, by far the biggest potential consumer market in the world. As a result of the dispute Google shut down its operations. According to a case study by the ICMR: “By the end of 2009, Google realized that its website was being attacked and the attacks originated in China. Google also found that Gmail accounts of some of the advocates of human rights in China were broken into. In January 2010, Google reported that its corporate infrastructure had been subjected to a targeted attack from China and announced that it would not censor its results any more and was ready to shut down its Chinese operations, if required”.
However, according to the same case study, before getting in to the peek of the dispute Google had already lost considerable ground to their Chinese competitor Baidu, who had the biggest market share in the local search engine market.

3) Google faces a slowdown in its growth. In the article by Ari Levi it states ”As sales gains diminish, some investors are concerned that Google has begun to resemble Microsoft Corp., which generates billions of dollars in cash from its mature flagship business yet has struggled to conquer new markets. Google’s sales increased nine per cent last year after almost doubling in 2005”.

But despite al these warning signs that gloom on the horizon, out of all the analist recommendations on Google, there was not one Sell. Are all the annalists wrong? Well looking back in time I would have to conclude that it would not be the first time.

But they are not wrong for the following three reasons:

1) The competition might be increasing, but so does the traffic on internet. More and more people are using internet and spending more time there. In marketing there has been an ongoing shift from the more traditional ways of advertising to online advertising. Google might have a smaller part of the cake in the future, but the cake is getting bigger.

2) Google is upping the ante by investing in R&D to create or buy technology not only to improve the search engine but also outside of its core products. The recent launch of the competitor of iPhone (with Android OS), which gained a substantial part of the market share, is proving that Google is indeed capable to do that successfully.

2) Most importantly, Google is still growing. Growing in the sense of making more money. Yes, the growth is slowing down and yes, there are more eyes aimed at what Google is doing and how it is doing it. But this does mean by far that they will cease to be more profitable and will stop growing.

So....let’s go back to the beginning of this blog-entry. As long as they grow and make more money in the future than they do now, the NPV of the future dividends will go up and they company will be worth more.

GOOG: HOLD/BUY