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Why I Bought Google

March 09, 2014 | About:
10qk

Gordon Pape

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A while back, I mentioned in a column that I liked the prospects for Google shares (GOOG). The main topic of the article was the problems at BlackBerry and how other tech companies have suffered similar crises in the past - and in some cases did not survive.

I suggested that Google was unlikely to experience a similar fate because of its innovative business approach which has taken it far beyond its origins as a search engine. At the time I mentioned that Google is exploring a wide range of technological frontiers from driverless cars to robots to high-tech glasses. Some of those projects will inevitably be written off. But the successful ones will translate into hundreds of millions of dollars in new revenue, as happened with the Android operating system.

I concluded that column by saying that, out of all the tech stocks, Google appeared to have the most staying power. I noted that the share price of $1,000+ was a deterrent to many investors but said that might look cheap in five years. I did not, however, formally recommend buying the stock.

It didn't take long for reaction to come in from Apple (APPL) lovers who felt I had disrespected their beloved company. One accused me of lacking "any understanding at all about the tech industry". Well, I'll plead guilty to that in the sense that I can't predict how all the innovations being pursued by both companies will eventually pan out.

I can see very clearly what the market thinks, however. In 2013, investors drove up Google's share price by 58%, far in excess of the return of Nasdaq, of which both it and Apple are key components. Apple shares lagged far behind both Google and the index, gaining only 6.4%. So far this year, it has been more of the same. Google stock has added another 8.7% in 2014, while Apple has actually given back 5.9%.

The markets aren't always right, of course, and Apple supporters will contend this is one of these times. If they're right, then Apple shares are a raging bargain. But Google clearly has momentum on its side right now.

Analysts tracking the stock feel it can't continue on the current pace. On average they expect it to reach $1,320 this year, which is only 8% higher than at present, although some projections are as high as $1,500. They're actually more bullish on Apple, with the mean target being $586, up 10% from the current level. The highest target is $777, a whopping 46% advance from where it stands now.

Perhaps something will happen to light a fire of that magnitude under Apple shares. It's a great company although it has yet to prove it can sustain the profitable creativity it enjoyed while Steve Jobs was alive.

If you have the money to invest in the U.S. tech sector, you can hedge your bets and buy some of both. But at those prices I wasn't prepared to make that kind of commitment. I took a close look at both stocks and decided to invest in 25 shares of Google.

This is a powerhouse company and it would not surprise me to see it overtake Apple as the world's largest corporation within a couple of years. Last year, it took in standalone revenue of $15.7 billion (not including Motorola Mobile, all figures in U.S. currency). That was an increase of 22% over 2012.

The company reported net income of almost $3.4 billion ($9.90 per share, fully diluted), up 17% from $2.9 billion ($8.62 a share) in fiscal 2012. The company ended the year with cash and marketable securities worth a mind-boggling $58.7 billion, compared to $48.1 billion at the end of 2012. By comparison, long-term debt is only $2.2 billion. Google is rolling in cash!

The company is using some of that cash to make strategic acquisitions. The most recent was the eyebrow-raising $3.2 billion purchase of Nest, announced in mid-January. Nest is in the business of manufacturing thermostats and smoke detectors, which seems far removed from anything Google does. But the purchase offers an opening for the company to gain a foothold in the smart home sector. It also brings iPod designer Tony Fadell (Nest's CEO) into the Google fold which, as Wired magazine pointed out in a recent article, gives the company "near-instant - and much-needed - credibility in the world of hardware".

I know it's going out on a long limb but it's feasible that Google could be the Berkshire Hathaway of the 21st century - a widely diversified and hugely successful company that everyone wants to emulate. Whatever happens, I want to be a part of it, hence my small share purchase. I'm adding Google to the IWB Recommended List as a Primary Core U.S. holding. The closing price on Friday was US$1,214.79.

About the author:

Gordon Pape
GuruFocus - Stock Picks and Market Insight of Gurus

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