As of April 2012, Google has around 325 million shares and at a stock price of $625 that represents a total market cap at $203 billion. The company has shown very strong financial performance with a profit margin of nearly 26%. With $43.4 billion of cash on hand and with a current ratio of 5.92, we see that Google has no problem meeting current liabilities. Compared with Yahoo! (YHOO) that has a market cap of only $18 billion at a stock price of $15 and a current ratio of 2.86, Google is doing quite well in comparison.
Although Google is doing well financially, it did fail to meet Wall Street revenue expectations for 2011. The expectation for Google to report $10.51 earnings per share were met by a short fall of about a dollar at $9.51. While this is still good earnings per share, the expected payout was reduced by decreases in prices charged by Google for ad placement. Revenues for ad placement are down an estimated 12% on account of increased competition from other smaller and mid-sized businesses now competing online.
In addition, the majority of Google’s revenue stems from its North American markets, and it has not yet sufficiently grown its international revenue stream. The most obvious example of this is the increasing popularity of Baidu ( BIDU) in China. While Google has the size advantage on Baidu, the Chinese search engine is much more popular for localized research. With much of the worlds market increasingly online Google needs to find a way to get a share of this revenue stream or fall behind.
In addition, the market is wary about the $12.5 billion Google paid to acquire Motorola (MMI), which represented a 63% markup on the trading price of Motorola shares at time of purchase. This purchase of Motorola pits Google directly against Apple (AAPL) and Microsoft (MSFT) in the mobile phone sector. The resulting competition has led to a veritable land grab for patents in the mobile phone industry. However, this move is most certainly going to lead to increased scrutiny from the FTC regarding anti-trust and monopoly laws. An ensuing legal battle would most definitely negatively affect Google stock and company value. And more recently, the EU has launched two anti-trust investigations into the practices of Motorola within European markets. Google additionally also faces its own anti-trust inquiries within Europe for allegedly rigging online search results.
The move to acquire Motorola shows yet another diverting of Google resources towards a new industry. These actions increasingly show a lack of focus and a move away from its core competencies. Google has shown in the last 5-6 years increasing movements away from its search engine; more notable transactions are the acquiring of Youtube and the start of Google+. I agree with the Wall Street analysts that worry that Google is stretching itself too thin. It’s rare for a company to perform equally well in all its product divisions, and even more difficult when the expansion reaches out across different industries. Google has been catching a lot of criticism lately for releasing products that do not have the originality and creativity of its groundbreaking Maps and Gmail applications. Lately it seems that Google is throwing out imitations of already existing products such as Google Music (iTunes), Google TV (Roku) and Google+ (Facebook), but none to any real commercial success. This lack of focus may remove what makes Google, Google.
In addition to its recent acquisition of Motorola, Google recently announced its stock split plan in April 2012. Almost immediately after the announcement stock prices took a dip of 4.1%. While the reduced stock price of nearly 50% will allow smaller investors to gain access to shares, this will hold no power over the direction that Google will take in the coming years. Newly issued stock will no longer hold any voting power in an effort to keep influencing abilities within the hands of the key stockholders. The leadership at Google has traditionally been very close-knit with decisions being made with a private master plan unseen by the public. However, in stock markets, dependability and transparency are a large part of investor confidence. And sudden changes in management and company direction will negatively affect the share price of Google. A key example of this was April 2011 when Larry Page returned as CEO and the stock price nosedived around $50 to a lower price of $531. While the market response to the stock split wasn’t as extreme as last year in response to Larry Page, it does show a lack of confidence in the leadership of the company.
I appreciate the innovation that Google shows in all its products and software creations. However, it is hard for me to recommend a stock that does not have clear cut short and long-term goals. It seems that Google has a master plan in mind of where the company needs to go. Relaying this plan in bits and pieces would serve to give investors peace of mind when it comes to purchasing the stock. While I don’t doubt that Google will be successful in the long run, barring any serious legal ramification from the FTC, this is not a stock I would recommend for short-term holders.