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There has been some talk lately that Google (NASDAQ:GOOG) should be scared of Samsung (OTC:SSNLF). There was actually a comment on Seeking Alpha that described the relationship akin to holding a tiger by the tail. These opinions reminded me of a line that I cannot accurately cite but don't want to claim as mine. It says something like - "if you owe a bank $10M you owe the bank, but if you owe the bank $100M, you own the bank." Apparently, everybody owes Google $10M but Samsung owes Google $100M. How is that for logic? Samsung is a chaebol because it has done tremendously well by itself and is a much bigger entity than meets the eye. It owes a lot of its success in smartphones, tablets and smart TV's to Google. You could also argue this inversely but let's at least agree the relationship has worked well for both sides.

So what's lurking in the shadows that should make Google to be scared of Samsung? I contend that Google has been too focused on "Search'" and not been assertive enough in controlling its burgeoning ecosystem. This over reliance on search has made Google very docile and vulnerable to disruption. If Google wants to take full advantage of its potential it needs to become more of a boss and find ways to start taking prisoners.

Reminder:

I thought I should serve a little reminder to tee this up. Note that Google Docs, Google Earth and other assets are not included below even though some of these assets contribute in completing the Google experience.

Category

Asset

Position

Mobile

Android

#1

Search Engine

Google

#1

Video

YouTube

#1

Email

Gmail

#1

Social Media

Google +

#6

Map Service

Google Maps

#1

Web browser

Chrome

#3

Market Cap

GOOG

#3

Backed up by Performance:

Google has outperformed the major stock indexes with a return of 33.74% in the last 52 weeks. It is trading at a trailing P/E of 25.50 with a PEG of 1.25 and a forward P/E of 15.38, all higher than its peers. It currently has a high target of $1,000 and a median target of $846.50. It grows revenue by expanding the user base of its tools and monetizing the traffic that uses its tools. The continuous expansion of its user base has supported significant revenue increases YOY in absolute dollars and percentage change. Over the last 5 years revenue has increased at an average of 23.5% and net income at an average of 27.4%. It is important to put these changes in perspective because the actual amounts are significant to incur such percentage changes.

2012

2011

2010

2009

2008

Total Revenue (B)

$50,175

$37,905

$29,321

$23,651

$21,796

% Change

32.4%

29.3%

24.0%

8.5%

Average

23.5%

Net Income

$10,737

$9,737

$8,505

$6,520

$4,227

% Change

10.3%

14.5%

30.4%

54.2%

Average

27.4%

EPS

$32

$30

$26

$20

$13

Source: Scottrade

Google also compares very favorably to its peers and industry in key attributes including its trailing P/E of 25.5 against a 19.6 industry average.

Metric

Google

Industry

Gross Margin

58.88%

47.81%

Operating Margin

25.43%

15.70%

P/Sales (NYSE:TTM)

5.4x

2.3x

Current Ration

4.2

1.6

Short Ratio

1.6

5.7

Dividend Growth (5Yrs)

0

6.53%

Source: Scottrade

Google's historical revenue growth and continuous expansion of its user supports the expectation of continuous revenue growth in the next few years. The charts below show that the stock's performance has mirrored revenue growth. If revenue grows at the established average of 23.5% annual revenue for 2013 should exceed $60B. At $60B, and if the relationship between revenue growth and the stock price remains the same, it is fathomable that it can approach the much speculated $1000.

(click to enlarge)

The Boss' Pulpit:

With all the above accolades why does Google not have the type of swagger that Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) have?

  • Competition: Google has to coax or coerce competition into the Android ecosystem. Even if it means funding Sony (NYSE:SNE), LG and HP's (NYSE:HPQ) product development and growth. Microsoft did it with Nokia (NYSE:NOK) and is starting to be really friendly with HTC so there is precedence in how to make it work. By relying on its dominance in search it is allowing Samsung to become too relevant and to develop too much of an advantage that inherently becomes bargaining power. Google needs competition to contain Samsung and to give its Motorola division a fighting chance when it is ready. Samsung is moving too fast and too often for others to keep up. Google needs to tighten reins and it can do that if it wields some power.
  • Patents: Apple, and to a lesser extent Microsoft, have harangued Samsung, HTC, LG and other hardware manufacturers for patent infringement and royalties. To Google's credit it has been more active with acquisitions and agreements lately but nothing near what Apple and Microsoft are doing. This sends a wrong message and probably one of the reasons why Samsung may feel it is better protected working with Microsoft. I can understand if Apple and Microsoft pester Google but for Vringo Inc. (NASDAQ:VRNG) to drag Google to court and win is unacceptable. I agree that I have an ego but egos are the currency in a game of egos. At a market cap of $242M Google should be sending a junior manager to take buy them off the market.
  • Search and Maps: If Google had charged $0.99 for every map downloaded from Apple's App store after Apple's maps led users to ravines a lot of Apple users would have happily paid for it. Why didn't it? Google plays possum with its search and maps despite its dominance. In instances were partners are hostile it needs to push back. Charging a fee might have seemed outrageous at first but would have probably made it harder for users to switch back to Apple maps whenever they become reliable because there would have been a switching cost involved. Nokia is monetizing maps and providing it as a service to other companies. Why can't Google do the same if it were not too concerned about collecting data? Hostility should be met with some push back, not a roll over.
  • Android: I am going to make a couple of points on this one and leave it alone. Again, I think Google needs to take advantage of the platform and be more assertive
    1. Amazon took Android for free and customized it for the Kindle which is the fuel behind its market leading position in book sales. Amazon also recently issued a mobile Ads API for Android developers to better target mobile ads which will impact Google's revenue.
    2. I read an article outlining how Microsoft makes more money from sales of Android devices than Google. I am not sure how to put this but it beats common sense.

Verdict:

Google's track record speaks for itself. It has grown slowly and steadily without a lot of hype because its revenue feels like "ghost revenue" and is earned rather covertly. As opposed to other companies that sell expectation, Google's stock has moved only when potential is confirmed. Google's dominance is going to remain impalpable but if it continues to be daring there is a chance there will be a day when you would not be able to get on the internet without touching one of their properties.

It, however, needs to do a better job of managing the randomness of its expansion especially with Android devices. It needs to be more assertive in certain areas to create more revenue streams and also help investors better understand how it drives revenue. Its biggest risk is its over reliance on search which is facing threats from different niche angles. Google also needs to start cultivating some culture and lifestyle into its products so they can elicit some emotion. With that said, Google has always been at the upper echelons in the different areas it has competed in and it must be doing something very well to be where it is today.

Source: Google Needs The Swagger Of A Boss