Google Growth Rates: How Mobile Kills the Model

| About: Alphabet Inc. (GOOG)

Google (NASDAQ:GOOG): One of the most, if not the most, innovative firms on the planet. They keep dreaming, and we keep welcoming them with open arms. After all, Google's bread and butter relies on search, so the more products they offer, the greater chance we'll use their search engine. In fact, I proudly use Google Docs daily, and have a Gmail account that I access through Chrome. How's that for brand loyalty?

That Google is innovative and incredibly revolutionary doesn't mean that its lofty $507.00 share price is justified. I place Google with a $360.00 valuation based on pure fundamentals.

Realistically when Google's earnings growth rate normalizes from the abyss, they will not be able to grow more than 3-7% a year depending on how things shake out. Future growth prospects remain bleak because they will not get the return on future investments prospects like they did with search. My belief stems from investments like Android alongside the behavioral shift in the market place.

The change involves how the consumer accesses the internet, by either phone or pc, and smartphones continue to gain market share. By 2013 more smartphones will be on the internet than computers. People don't use mobile search anymore like they used to. Instead, they Yelp when they need to find a store, use Open Table when they want to get something to eat, and access The New York Times when they need the news - all bypassing Google's master plan.

How can Google compete against a behavioral shift?

The analysts will not speak of such a horrid thing, and just like CNBC with all those "American Titan$", they are a bunch of bullish slow moving cheerleaders. Could it be that big banks have an interest in selling you the shares? I know if I wanted to unload a massive amount of shares I'd try to make them look as attractive as possible. Chinese walls don't exist because banks shouldn't be able to increase their own institutional stake at the same time their analyst downgrades the same security. How's that for playing both sides? It seems that the public relies too heavily on analyst misrepresentations; otherwise they'd price it differently.

As a progressive swing trader, you must not be afraid of standing alone and having the courage of your convictions - that is, after you've done your grunt work.

Google doesn't make a cent off of any Android app. sold. Direct from Android's official blog:

Developers will get 70% of the revenue from each purchase; the remaining amount goes to carriers and billing settlement fees—Google does not take a percentage. We believe this revenue model creates a fair and positive experience for users, developers, and carriers.

Apple (NASDAQ:AAPL) has proven that you can monetize an application ecosystem. In fact, according to, Google actually shares revenues with phone carriers when a user accesses Google search on a respective network. Is Google just paying carriers to adopt their OS and integrate their search engine? If I were a carrier this would be a no brainer, because I'd want a piece of Google.

One could argue they did it for open source, and all that free market for-the-people stuff, but let's face it: They need ridiculous earnings growth, like 15-30% a year, every year, to sustain such high valuations; otherwise, they can't please the shareholders. You all know what happens when you can't please growth-driven shareholders, right? posts monthly US Monthly Search Engine Rankings, and for April, Google went from 65.1% to 64.4% in one month, which equates to about 50MM fewer searches month-to-month. I know that doesn't sound like much when you're talking in billions, and it could be easily gained back in other months, but Google has lost 1% of market share year-to-date. At this pace, Google could lose another 2-3% of US market share by year's end.

The problem with this analysis is that Google is a global company, and even though the US is the largest market, it only makes up about 17% of global search. This data could be a bit abnormal because of the 2008-2009 global rout. Take it with a grain of salt.

Remember, Google isn't in China anymore, which is the number 2 of all global search origins. How does one compensate for losing China altogether? Even if Google miraculously made it up internationally, the dollar has remained stronger than usual, which will put a drag on future earnings.

A potential major innovation that could derail my bearishness is their push into high-speed broadband. We will have to see how the pipes get laid and things develop. Since it already has been announced, I do not anticipate any near term big catalysts propelling the stock. The biggest risk I see right now is if Google somehow reopens China operations, which would derail being bearish for a bit. Or if they get into TV. Investors would love that.

I could envision that with broadband, they could introduce free internet with advertising built in - on Chrome OS, in the cloud. How does that translate into more searches? Not sure, considering internet on-the-go's trend. I do think Google search remains at the heart of the internet for the computer, but not for the phone. As long as the internet on-the-go continues to make headwinds, there could be a serious risk to future growth.

The golden years of Google being Wall Street's darling may very well be behind us. The real question is whether or not the Street will come to terms with this, or will they just continue to misunderstand what Google really is - a transformed value name that's stuck in a growth stock's body? They say fundamentals rule all, but they also say the market can stay irrational longer than you can say solvent. The fact of the matter is that we are getting closer and closer to internet on-the-go becoming the major market force in the world.

Disclosure: Author is long a vertical put spread on GOOG

About this article:

Tagged: , , , Internet Information Providers, SA Submit
Problem with this article? Please tell us. Disagree with this article? .