GOOG Stock: Why Did Google Invest $550 Million in JD.com?
Google Antes Up e-Commerce Gamble
Regardless of how you feel about technology stocks, everyone can agree that Alphabet Inc (NASDAQ:GOOG)—formerly known as Google—is one of the greatest investment stories of our time.
The numbers don’t lie. Quick arithmetic reveals that anyone who invested $10,000 in 2004 would have more than $200,000 today. Anything over $50,000 could have made you a millionaire.
Chart courtesy of StockCharts.com
But does that mean you should invest in GOOG stock today? Or has this tech giant run out of steam?
We got some insight into this question when Google recently announced that it would be investing $550.0 million into JD.Com Inc (NASDAQ:JD). (Source: “A strategic partnership with JD.com,” The Keyword, June 18, 2018.)
For those in the dark, JD.com is a Chinese version of Amazon.com, Inc. (NASDAQ:AMZN), with more than 301 million active users.
I know that Google often makes investments into promising companies, but this was different. It was not a random act. And to be entirely honest, I think it could send Google stock skyrocketing into uncharted territory.
Let me explain.
Since it went public, the Google stock price has been driven by search traffic.
The company controls a huge portion of the market, meaning that, even if we’re using “iPhones,” “iPads,” or “Macbooks,” we’re still probably going to use Google over competing search engines.
To its credit, Google has managed to monetize these eyeballs. It has built a gigantic advertising business that, at one point, accounted for more than 98% of the company’s revenue. But that has started to change in recent years.
Google realizes that other income streams are necessary to keep the Google stock price well fueled for the future. That’s why the company is investing heavily in driverless cars, cloud computing, and e-commerce.
Can Google Really Take on Amazon?
On the topic of e-commerce, pouring half a billion dollars into JD.com is clearly Google’s way of challenging Amazon in the online shopping space. Does it stand a chance?
The idea may sound ridiculous at first, because Amazon is so clearly the king of online retail that any mention of a competitor sounds far-fetched. But don’t count Google out just yet.
The $550.0-million partnership with JD.com is strategic. It gives Google an instant presence in Southeast Asia, a region with growing Internet access and rising incomes—where online shopping is expected to reach $88.1 billion by 2025.
Moreover, it gives Google a way forward after last year’s disastrous court decision.
In case you’ve forgotten that particular episode, let me remind you. A European court found Google guilty of skewing search traffic in favor of its own “Google Shopping” results. This was seen as an abuse of power, plus it wasted significant time and resources on a failed strategy.
Now the company seems to have found a way forward, guided by the principle, “The enemy of my enemy is my friend.”
JD.com is bound to tango with Amazon in the years to come. Google is simply arming them for that fight, both with money and intellectual capital. I wouldn’t be surprised if Google also invests in Amazon’s Indian rival, a powerhouse called Flipkart.
“By applying JD.com’s supply chain and logistics expertise and our technology strengths, we’re going to explore new ways retailers can make shopping effortless for their consumers, giving them the power to shop wherever and however they want,” wrote Karim Temsamani, President of Asia-Pacific Operations. (Source: Ibid.)
“As part of our partnership, JD.com will also join Google Shopping and bring a selection of their high-quality products to consumers in multiple regions around the world.”
Analyst Take
Take a closer look at Google’s last earnings report and you’ll see a huge drop in the relevance of its advertising revenues.
Sure, they grew 24.4% from the same quarter last year, but they ultimately accounted for 85.5% of total sales, a much lower percentage than in years past. (Source: “Alphabet Announces First Quarter 2018 Results,” Alphabet Inc, April 23, 2018.)
This shows that Google stock has multiple growth engines. So, even if one of those engines begins to fail, the company can remain flying high. When you also consider Google’s adventures in driverless tech, the Internet of Things (IoT), and cloud computing, it’s almost impossible to be bearish on this stock.
