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Larry Page and Sergey Brin founded Google (NASDAQ:GOOG) in January 1996 with the objective to ‘organize the world's information and make it universally accessible and useful'. Since then, the company has gone on to become the goliath of the Internet. It dominates the Internet with a commanding share of the web search market.
Investors who got into Google shares at their initial public offering price of $85 a share in August 2004 have seen the value of their investment compound at a 36% annual rate, nearly 10 times faster than the S&P 500 (SPX) index.
Now, Google’s lead over its competitors appears to be eroding.
Competitors closing in
Google’s search market share is holding steady but gone are the days when the company consistently reported gains in market share.
Microsoft’s (OTCQB:MFST) upgrade of its Internet search engine Bing is enabling the company to gradually gain search market share. Microsoft can become a formidable foe when Yahoo! (NASDAQ:YHOO) and Bing are fully-integrated.
Following differences with the government of China on censorship and privacy-related issues, Google has decided to transfer its search engine operations to Hong Kong. Google’s exit from mainland China provides opportunities to its Chinese competitors like Baidu (NASDAQ:BIDU), SOHU.com (NASDAQ:SOHU) and Sina (NASDAQ:SINA) to strengthen their positions in the world’s largest Internet search market.
Meanwhile, Facebook is challenging Google’s standing as the most visited website. Experian Hitwise (OTCQX:EXPGY) recently reported that Facebook’s share of online traffic exceeded Google’s for the week ending March 19, 2010. Facebook also appears to be making a concerted effort in bringing Google employees into its fold in a bid to beef up advertising.
Where do Google shares go from here?
Analysts' currently expect Google to grow earnings per share by 18% in 2010 and 15% in 2011 and the company’s shares currently trade at nearly 20 times 2010 EPS estimate.
According to Value Line (NASDAQ:VALU), the average P/E multiple on Google’s shares has contracted from a high of 53.4 in 2005 to 21.5 in 2009. If Google’s competitive position erodes and uncertainty on growth prospects increases, investors are less likely to reward Google’s shares with a higher P/E multiple.
Google’s management has its work cut out. The company needs to pick up the gauntlet and deploy its resources … $25 billion in cash and short-term investments and nearly 20,000 talented employees … to increase its growth rate by adding new revenue streams and by complementing current ones.

Frontier areas like mobile-ads and disruptive technologies like eBook Readers offer promise. To shore up the former, Google is trying to acquire AdMob. For the latter, Google is collaborating with eReader makers like Sony (NYSE:SNE), Barnes & Noble (NYSE:BKS), and Samsung Electronics (OTC:SSNLF) to deliver content to users.
If Google succeeds in its plans to shore up growth, its shares should have little trouble reclaiming their all-time high. If the company falters, its shares could go the same way as Kodak’s (EK) or Xerox’s (NYSE:XRX).

Disclosure: I do not have long or short positions in any of the securities discussed.
Source: Will Google Regain Its Glory or Stumble?