The next leg on Google (NASDAQ:GOOG) is very likely to be down. Although you will note I'm not selling.
Google shares are bound to come under pressure following completion of its Motorola Mobility (NYSE:MMI) acquisition. Regulators have finally given the go-ahead although, as some are correctly noting, it is with a warning that Google should rein in its horns on trying to enforce patents that are part of industry standards.
Google won't do that, because Google can't. The patents on standards, which are supposed to be enforced under Free, Reasonable And Non-Discriminatory terms (FRAND), are its primary defense against Apple's host of design patents that ring the iPhone and are supposed to give it a monopoly on that look-and-feel, and those features of voice, tap and touch.
If that doesn't send Google stock reeling, then Motorola's huge sales and lack of profit certainly will. Google has now grown by one-third in revenues, but not one point in profit. It must squeeze some profits from Motorola for the deal to make sense, and there is ample skepticism it can.
So the next leg is down.
My belief is that CEO Page is thinking strategically, seeking to build a complete Google ecosystem like that of Apple and Amazon, but with consumer web services leading the train rather than devices or e-commerce. My belief is that success will make Google competitive against both its rivals, and that its control of low-cost infrastructure will in time tell.
But that's a bet that will take 3-5 years to play out. If you buy Google at its present level of about $617/share, you will eventually come out whole.
My own basis in Google shares is over 100 points down from here, and I only have 20 shares, but if I had a major position I'd be lightening it right now, looking to buy back in after the bad news has washed out the stock, somewhere south of $500. The momentum plays are Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN), but the big gains may well come from Microsoft (NASDAQ:MSFT).
For an Apple shareholder to get the same percentage gain a Microsoft holder does when their stock rises by $1, they need a gain of $17. The last $100 in share price gains for AAPL have only been a move forward of 20%, and the next $100 will only be a gain of 16.6%. A Microsoft shareholder who sees $40 has done better.
That's likely to come about, because Apple's patent attacks on Android are going to enable some corporate success for Windows Phone, and Microsoft is not subject to that patent attack - its defenses are sound and it's already getting money from Android up-front, before Google gets paid in ad sales.
In a rising market, this speculation could easily take Microsoft past $40, even if its financial results don't really justify it. The PE would just go up to something closer to Apple's own, currently moving toward 15.
There's easy money in this trade, which I've already made. I put in for 100 shares of MSFT at about $30/each, and I'm ready to ride them.
How are you set?