Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Can Google Overcome Potential Pitfalls?

Friday, April 27th, 2012
By for Profit Confidential

Google Inc. (NASDAQ/GOOG) is one of the most unique technology stocks. There are many technology stocks that try to rival Google. Google sets itself apart from other technology stocks through innovation as a key investment strategy. But this desire to expand too far has led to some mistakes. While many investors believe Google to be a pure marketing company, it has expanded its investment strategy to include the retail sector.

The retail sector is a slightly different animal for Google and technology stocks need to adapt their methods for that sector.

Google has recently announced that it will be selling tablets directly to consumers, along the same lines as Apple Inc. (NASDAQ/AAPL). Technology stocks will tend to copy each other once they see a firm has been successful with an investment strategy. The tablet market is one in which Google is falling behind, as Apple currently holds approximately 73% of the market share, according to industry research firm Gartner Inc. In addition to Apple, Amazon.com, Inc. (NASDAQ/AMZN) also sells a tablet, for the lower end of the retail sector, which funny enough runs off of Google’s “Android” operating system.

The success of Amazon’s tablet, the “Kindle Fire,” is a problem for Google, as other firms decide to build their platform on top of the Android operating system. This will cause more fragmentation in the retail sector, resulting in Google losing control of its operating system. The advantage of Google’s search engine is that it controls and can keep track of all the searches that are occurring, mining this data for marketing purposes. This data is worth billions of dollars. Once another company builds its system on top of Android, Google does not have access to this information. Amazon collects and stores the data from the Kindle Fire, not Google.

The retail sector is a tricky investment strategy for many firms, including technology stocks. The last attempt by Google to try to sell to the retail sector directly ended up in poor results with its “Nexus” phone. The new tablet to be sold directly the retail sector this time should work somewhat better. The main problem with the investment strategy of selling a phone online directly to the retail sector is having deals with cell phone carriers across different locations and countries. This won’t be an issue for tablet users, as many forgo data plans and primarily use Wi-Fi.

Google just announced that it is adding a cloud storage service to compete with other technology stocks. I can see an advantage that Google might have over other technology stocks, as its understanding of data search and storage is most likely at the pinnacle of the industry. The main problem that I see with all of these plans is a lack of a complete ecosystem tied together, as compared to other technology stocks like Apple and its “iOS.”

The really interesting information comes from Google itself, as it reported the percentage of users running each version of Android. According to Google, only 2.9% of Android devices are using the latest operating system. Over 86% of Android users are using old software, without the latest bells and whistles. Either the devices can’t get upgraded to the new software, or consumers aren’t buying the newest devices. Either way, it’s not a good sign for Google.

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When developers build applications (apps), they assume the latest operating system is in use. As we all know, consumers want tons of apps to play with. Without the apps, the device is useless. A perfect example is Research In Motion Limited. (NASDAQ/RIMM), as I wrote in my article, Beginning of the End for RIM? Now, let me be clear; I am not comparing Google with RIM. Google is far and away a better company than RIM. I’m only suggesting that Google needs to pay careful attention to the retail sector and formulate an investment strategy that makes sense for the long term. With the brilliant minds at work there, I certainly would not bet against the company. With the stock trading at a forward price-to-earnings ratio of just over 12, the valuation makes a compelling case; however, I would wait to see what the reaction in the retail sector is to these products and services.

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Sasha Cekerevac - Investment Advisor, Fund AnalyzerSasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. Add Sasha Cekerevac to your Google+ circles

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