Inarguably 2013 has been the year of Google (NASDAQ:GOOG). While Apple (NASDAQ:AAPL) has been substantially mute since October, the Mountain View search giant has been constantly under the focus by relentlessly unveiling new products, new apps, new services. In response, the stock has never been higher, the hype around the company has ever been stronger and its leadership has probably never been more confident, and more ambitious. But if you still think of Google as your friendly neighborhood search engine aimed solely at making (tons of) cash by displaying ads relating to queries made on its clean and minimalist homepage, think again.
It's difficult to hide it: with every new product and every new service, Google is creeping in every aspect of our lives, digital and physical. Everything we do on the web, Google wants to know it, store it, and eventually monetize it.
Glass is nothing more than a "Google filter" applied to the real life. Some praise the fact that it will free you from the need of constantly looking for and at your smartphone, therefore diverting the focus from the things around you. But Glass is actually much more pervasive than a screen in your hand: once you put it on, you have Google nonstop in front of you. Even when you do look around you, the web is there, Google is there. There's no such thing as putting it back into your pocket with Glass: whether you're working on a spreadsheet, having coffee with your boss or talking with a friend, Glass (and therefore Google) will be constantly between you and the things around you.
Google Now is Apple's Siri taken to a whole new level: while the latter prides itself on being your "humble assistant," the former aims much, much higher. Everything you ask or search for gets methodically stored and analyzed so that, quickly, Google Now will be able to know which sports scores and which tickers to show you before you even ask. Google Now scans your email, and pretty thoroughly too: it knows when your Amazon package is arriving and alerts you. Of course, it also scans your calendar and makes sure to alert you on time by reminding you to leave in order to make it to the appointment. All without asking.
Then there's Google+, which will turn two years old in less than a month. Those looking at it as a failed social-network attempt, thinking that Google launched it just to steal user-share from Facebook (NASDAQ:FB) are clearly missing the big picture. Google+ is actually the triumph of Google's quest for grandeur. Benedict Evans at stratēchery has a great piece on this:
Google+ is not a social network meant to compete with Facebook. Rather, it's an identity system that follows you everywhere.
Think about it: what is more valuable? Inane chatter, memes, and baby photos, or every single activity you do online (and increasingly offline)? Google+ is about unifying all of Google's services under a single log-in which can be tracked across the Internet on every site that serves Google ads, uses Google sign-in, or utilizes Google analytics.
Every feature of Google+ - or of YouTube, or Maps, or GMail, or any other service - is a flytrap meant to ensure you are logged in and being logged by Google at all times.
YouTube is great by itself, but it works better if you have G+ account. Maps are undoubtedly the best navigation app out there: they work way better with a G+ account. Google Now is arguably the best "assistant" you can have on a smartphone: you need a G+ account to use it. GMail is considered the best email provider: it is a G+ account. Google Voice has just been unified with Talk and Messenger in Google Hangouts, which obviously requires a G+ account. The same Google Glass is built around Google+. Ultimately, Google+'s purpose is then that of allowing Google to gain access to what you like and what you look for, wherever you find yourself in the web and in the real world. Google+ even knows who your friends and relatives are: it scans the pictures you upload on it and automatically finds that information. It even knows if the subjects are smiling or not. If they're not smiling, it can look for other pictures where they are and substitute their face. But Google has been so capable of entwining all its main services around Google+ that the "social network" now boasts more than 500 million users, almost half as much as Facebook. And all these users are willingly giving Google access to their activities on the web. Maps users even allow Google to (anonymously) track them wherever they go. And all this information is incredibly valuable to Google: it allows the Mountain View giant to better target the ads and, therefore, charge a steeper fee to companies by giving them better probabilities of reaching the right audience.
But building a service capable of tracking every move of its users when used is nowhere near the ultimate goal of Google. In the heart of their headquarters in Mountain View lies Google's "secretive" lab, Google X. Businessweek has recently gained access to this facility, and described it as "a laboratory whose mandate is to come up with technologies that sound more like plot contrivances from Star Trek than products that might satisfy the short-term demands of Google's shareholders" while seeking "to be an heir to the classic research labs, such as the Manhattan Project, which created the first atomic bomb, and Bletchley Park, where code breakers cracked German ciphers and gave birth to modern cryptography."
But this is no Apple-level secrecy. While in Cupertino everything happens behind strictly sealed doors, Google X enjoys some level of publicity, openly disclosing some of the ongoing projects. Google hinted at a new Motorola "super phone" last January, the Moto X, and just last week the CEO of Motorola gave us a few more details at D11. Laden with sensors that draw little power, the smartphone is supposed to be constantly gaining information about its whereabouts, for example knowing when it's taken out of someone's pocket, or if it is moving at 70 mph in, say, a car. So regardless of whether you're actually using it or not, the phone will be mining information non-stop, with access to all your communications and movements, and elaborating it via Google Now. The objective? Knowing what you want before you even ask for it. Indeed, creepy and magical at the same time.
But Google doesn't stop here. You may have the greatest system to collect queries, traffic and data, but if not enough people use it, it will never be effective. In some way, therefore, Google has to gain access to more and more users. In other words, maximize the amount of users: that's the reason why they built Android and gave it away for free. And that's the reason why they've gone on this colossal quest of wiring cities from scratch to give households the fastest internet connection, which is Fiber, and why they're going to develop their own wireless network in emerging markets. More users.
Horace Dediu recently elaborated an incredibly effective metaphor to describe this process (actually the whole piece is an amazing read) [slightly edited]:
Google tries to make a business succeed through having a huge amount of _flow_ in terms of data, traffic, queries and information that is indexed. Now imagine this flow as the Mississippi river: the business is capturing fish at the mouth of the river, before it exits into the ocean at its delta. But in order for you to improve your business, you want to essentially have more water flowing. One thing you could do to improve your business would be to make it rain more. Fiber means the water will flow more rapidly: you're essentially dredging the riverbed. But the two are very disconnected (rain, dredging and fish). So your strategy amounts to not really worrying about the ratio. In other words, your performance as a manager should consist of simply putting out the mandate of "Go out and make it rain".
Google then seems to be the world's "internet civil engineer". They are building all these things to make sure that we have good water (i.e. internet) supply. That we have plenty of navigable channels. That's the analogy. But let's not forget that the only reasons those things are happening is because they are catching fish at some point down the Mississippi.
In Dediu's metaphor, "fish" is nothing more than the queries and the data created by users. The "rain" consists of all the platforms and products that Google has created to maximize its user base (Search, Android, YouTube, Chrome and Chrome OS, et al). The "nets" catching fish at the delta of the Mississippi are the services used to effectively collect data from all these users (i.e. the combination of Google+ and Google Now).
In conclusion, (to borrow again from the previous metaphor) there's no other company in the world catching as much fish as Google. Facebook knows it well, and has been tempting to steal user-share from Google for years now, putting nets upstream like Home (which is turning out to be quite a flop) and building direct competitors like Graph. Neither of these has created a tangible threat to Google. In fact, in addition to owning the most popular search engine, the most popular email provider and the most popular web browser, Google has activated almost 1 billion Android devices, and has access to 500 million Google+ accounts. The product pipeline seems pretty enticing too, with the Moto X coming later this year and Glass making its official debut in 2014. The amount of information Google is getting access to is enormous and contrary to other peers (like Facebook), the Mountain View giant knows how to effectively monetize it. Plus, Google currently sits on a $45 billion cash-pile, while producing more than $15 billion in operating cash flow a year.
For these reasons, Google may seem a huge long candidate. But there are some risks to keep in mind. For starters, valuation is the biggest issue that makes shares unattractive at these levels: the huge rally the stock has experienced, culminated at $920 just twenty days ago, has given Google a trailing P/E over 25, right at the top of the range the stock has moved in for the last three years-and-a-half. Moreover, analysts are expecting Google to grow at an annualized rate of 15% for the next 5 years, below the growth rate of 20% registered in the past five years.
Furthermore, and most importantly, the same combination of Google+ and Google Now that is currently helping to make Google so successful could, eventually, brutally backfire. What Google is doing is pretty close big-brother as it can get: just look at Google's brand new service, "Music All Access," unveiled at its I/O conference in May to rival Spotify, which is yet another way to amass the preferences of its users and sell them more ads. All these users are not blind, they see what Google is doing, but they (still) allow it because, simply put, Google offers the best services out there. But are we sure that giving away tons of information about our web habits (and even real life habits by using Maps) and personal details just for the sake of faster search, better pictures and immediate responses from Now, is what we want? There's long been a debate whether Google is good or "evil," but the subject has arguably never been as much discussed as now. Indeed, should Google's practices be seen more and more as big brother-like, or should Google force its hand excessively in its tracking methods, there could be a huge exodus from Google+ (and, as a consequence, from the connected services) with dramatic consequences for Google. Google is adventuring in a dangerous zone here, and current or will-be-shareholders should be very aware of this.
Additional disclosure: I may enter a short position in GOOG at any time. Every investor is warmly advised to do proper homework before acting directly in the market. Any material provided is for information purposes only, and should not be construed as an offer to buy or sell any security.