Google (GOOG) is one of the best known companies in the world, with products that are accessible in many ways and that consumers take for granted. However, is it possible that Google could be stumbling into a stalemate for years to come? Has Google reached its peak while investors wait for something to happen?
This is a very realistic scenario for investors because Google's chart is clearly showing a downward trajectory. Among other things, this downward trend could be due in part to the extreme pace at which Google is acquiring other companies. Google does have $36.7 billion in cash at its disposal, but the nonstop attempts to expand the company may be in fact hindering growth. Share price growth is hindered by too many acquisitions because investors want to see what Google will be doing with the new companies. Also, too many acquisitions can lead to many of the companies leeching money from Google before it decides to scrap the project.
It is almost as if Google has decided to buy 50 companies every year and even if only one turns out to be a blockbuster, the company will prevail. This is more or less true, but investors want to see proof now that Google has a long term plan before investing in the high priced company.
Click to enlarge:
As I mentioned, by studying the chart it is easy to see Google has been stuck in a rut since January 2010. During this period, Google's share price has faced extreme resistance at the $630 level since reaching an all time high of $741.79 on November 6, 2007.
Including 2010, Google has approached $630 five times, but the share price has never been able to break the resistance. The first time was January 4, 2010 in which the stock price hit $626.75. On November 8, 2010 the share price closed at $626.77 and then faced a pullback. However on January 28, 2011 Google's share price eclipsed the $630 level as it closed at $639.63. This was important because it showed that once the share price surpassed that resistance, investors felt the price was too high. Google's share price took two more shots at the $630 level on February 14 and 18 of this year. The price closed at $628.15 and $630.08 respectively. Since February, the share price has fallen to the level it is now; which is about 17% below that $630 resistance.
Another question lingering in Google investor's minds is whether or not Google will be stuck where it is for the long term, and can Google break the hold Apple (AAPL) has on the market? It is difficult to say, much less prove, that Google will be stuck in a long term rut since the company is producing new products and features that rival Apple's (AAPL) iTunes, iPhone, and iPad.
Google is developing and attempting to take Apple off the throne; according to a recent Google release about the Android system. One big innovation for Android devices is the launch of Music Beta. Also, movies will now be able to be rented via the Android market. Not only are these two innovations directly copied from Apple's iTunes, but Google is also taking the process one step further as everything is on the cloud. Also, the release of the Ice Cream Sandwich OS towards the end of 2011 will give Google a boost in 2012. Even with these products, Google has a big hill to climb to knock Apple off the throne.
Apple hill
As I mentioned, Apple may stand in the way of Google and Microsoft (MSFT). For instance, since the first quarter of 2010, Apple's share price has steadily increased while Google's and Microsoft's share price has declined. Obviously Apple currently has a majority of the market, but what are the reasons why Apple has been able to succeed and leave Google behind?
One of the biggest reasons is Apple's marketing scheme. The way in which Apple markets its products is very hip and fashionable. This appeals to young and middle-aged consumers. However Google has countered this by marketing the Android OS in a hip way as well. In Google's case, the little green Android figure is a fun way for Google to promote the device. Also, Google has named its OS with tasty food names such as Gingerbread, Honeycomb, and Ice Cream Sandwich. Another advantage Apple has, that Google cannot claim, is the longevity of producing products such as computers and iPods that are simple for everybody to use. Also, it must be remembered that Apple's iPod and iPhone caused the collapse of Microsoft's portable media player Zune. This is another thought Google investors must keep in the back of their minds.
Click to enlarge:
As we move forward to the second half of 2011, Google garners great respect from analysts; the average target price is about $700. According to this estimate, Google would have to far surpass the resistance point I put on the share price. That is not impossible, but it is looking very grim at this point.
I will not give an official price target on Google, but the price should at least make it to the $600 level by the end of the year. With that said, Google will need superior earnings the rest of the year to make that price move up. Also, Google will need to start producing, or at least begin developing, new products that can take control of the majority of a new type of market. Since one problem with Android is that it competes against Mac computers, iPhone, and iPad which are all very prominent devices.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
