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This past decade has been coined “Google’s (GOOG) decade.” It was a time when GOOG was able to eliminate almost all its competition in the search engine sector, dominate e-mail, engineer a mobile platform that rose to be number one in the world, and enter China and other major foreign nations. For this tremendous growth and productivity, the company trades at 19.7 times earnings, which is far higher than its technology counterparts like Yahoo (YHOO), Microsoft (MSFT) and even Apple (AAPL), which trade around 15 times earnings. An issue is arising that the company can do little to nothing about: The bar is becoming too high for expansion and growth and thus, even with stellar earnings and moderate growth, Wall Street will be disappointed.

On Friday, GOOG reported earnings that did not meet analysts’ expectations of $9.50 per share v. analysts’ expectation of $10.50. This was the first miss in roughly a year and investors sold heavily on the news. The stock immediately traded down a gap of 7% on the news. Though Larry Page wrote “I am super excited about the growth of Android, Gmail, and Google+”, there are many questions to be answered about whether GOOG is over-valued and whether or not it can continue down this path of rapid expansion and over-achievement. The question does not become whether GOOG can thrive over the next decade; the question becomes whether the stock will decrease due to it being over-valued and facing headwinds. There are several key factors that have the potential to repress GOOG's performance in the coming years.

Tougher Competition:

As aforementioned, in previous years GOOG has been able to diminish the power of its largest competitors: YHOO and AOL in the search engine sector and Apple in the smartphone sector. GOOG's ability to take on the largest companies in their respective industries has enabled it to build a multi-faceted company with little competition in the core of its business. The landscape, though, is going to chance in the coming years because as GOOG enters other sectors (like manufacturing with the acquisition of Motorola Mobility (MMI)), other companies will be entering GOOG's space in its current market. Facebook is a prime example of a company that has infringed upon GOOG. This year, Facebook launched email and a greater platform for searching on the web. This type of competition is only beginning for GOOG. MSFT has been trying to enter the web for years, attempting to acquire Yahoo in 2011. With Microsoft’s $55.94 billion in cash reserves (excluding debt), it will be attempting to break into this growing market and challenge its biggest rivals: GOOG. One of the greatest potential restrictions in GOOG's growth is due to rising competition in foreign markets like China, India, and Japan.

  • Owen Fletcher of MarketWatch reported last week that GOOG's China market share is down to 16.7% from a high of 35.6%. This is largely due to Baidu (BIDU) being able to build market share in the most populated nation in the world. In India, Guruji is a large player in the search engine field restricting GOOG's ability to grow. This marks a few of many examples where GOOG is not looked upon as the kingpin due to foreign perceptions and a different digital landscape.
  • Another area of increased competition is within GOOG's acquisition of Motorola Mobility. In entering a sector where GOOG has little to no experience, it will be the underdog in competing against never before competitors like Samsung, Nokia (NOK), and LG (see below*).

Regulatory Trouble:

In the same way that MSFT in the 1990s faced intense heat for allegedly using its power to create a monopoly over the personal computer, GOOG could be up for an intense fight with Capital Hill about its privacy and piracy concerns. Over the past several weeks, Wikipedia and Craigslist have joined GOOG in protesting the SOPA laws that are being put in front of Congress. If these laws get passed they will force GOOG to change its algorithm to be more transparent, says Ben Elowitz of Digital Quarters. This type of regulatory shift could not only cost the company billions, but allow social networking sites like Facebook to become more popular due to a less regulated format.

Regulation in China and other foreign nations has restricted GOOG from gaining market share and being able to operate abroad. If this restriction continues or gets more severe over the coming years, GOOG could be forced to lower projections about global growth.

Increasing Cost and Decreasing Profit:

GOOG faces the task of managing its many businesses and being able to strategically tackle the myriad competition. In this hope to dominate more industries comes a potential for higher costs due to the need to be competitive, the need to invest in new products, and the need to calm potential regulatory fears. Another major cost that could be systemic for GOOG is the acquisition of MMI. Jason Maynard of Wells Fargo stated that the "biggest challenge" in the Motorola deal is the fact that it is "outside of Google’s core competency and adds increased complexity to the Android ecosystem". All of these factors together could lead to a decreased profit outlook, which would have a very negative effect on the nearly highly valued stock.

click to enlarge image

(Courtesy of CNBC)

Conclusion:

With rising competition, regulatory struggles on the horizon, and changing costs, GOOG is about to enter a time where earnings results and growth may not be up to Wall Street’s ambitious expectations. If only one of the aforementioned ideas takes hold, GOOG could be in for a dramatic change in perception by investors. This upcoming decade will be a new age for GOOG where increased competition and saturation of the market could lead to dismal results and a valuation that is less than its current outperformance of the industry.

Source: Be Wary Of Google: A Price Ceiling Is Imminent