An interesting phenomenon exists in the music industry. When an impressive new band forms and starts hitting the small venue scene, a certain crowd of independent music enthusiasts adopts the band as a new obsession. These fans pride themselves on knowing and supporting talent that remains unknown to the masses. They wear the rare t-shirts and talk about the band members as if they have been the best of friends since conception. Consequently, these fans self-righteously believe they are “cool” and “truly” know about cutting-edge new music, while the rest of us are brain dead squares who only know what the media power elite shovel into our ear holes.
A similar phenomenon is unfolding with Google (Nasdaq: GOOG). Google was a classic garage startup (band?) founded by two engineers from Stanford. Tech geeks and college students quickly became groupies of Google’s golden search algorithm. Those who used Google were the Web’s avant garde, and those who did not were the brain dead squares who browsed the godhead of information through Microsoft’s (Nasdaq: MSFT) MSN, TimeWarner’s (NYSE: TWX) AOL, Yahoo! (Nasdaq: YHOO), or any other search engine your parents (or grandparents - gasp!) were using. Google.com was the feng shui zen bikini model, all others were content-cluttered faces with pimply banner ads and barely noticeable search bars.
At first, indie fans used the word ‘Google’ as sexy slang for searching the web. “Google like this … Google like that … Google with a baseball bat.” However, like Kleenex and Xerox, Google soon became synonymous with its product. More and more unhip adults began saying “Oh Mel, just Google your meds for a Canadian website that sells at a discount,” and “I Googled that video game and you cannot play because it has foul language.”
Once the uninitiated start liking your secret indie band or search engine, it’s time to wage a major PR campaign to smear the “evil corporate sellout.” I’m not a shrink, but it seems that when persons create part of their identity around something they perceive as special and unique, those persons quickly abolish any association as soon as their beloved identifier becomes commonplace - and Google is no exception.
Last week’s The Economist featured two commentaries (disguised as articles) throwing some very large stones at the great evil sinner: Google. In short, the articles raise a host of hypothetical issues that could bring Google to its knees. They pull out all the stops including Orwellian foreshadowing, interviews with disgruntled ex-employees, and overwhelming attention to expansion into lower margin revenue streams.
I don’t know about you, but the last time I checked, Warren Buffett recommended companies that are as close to monopolies as possible, with excellent returns on investment, high rates of growth, and powerful brand names. If you ignore all the fear mongering in The Economist, you would have a nice set of facts that meet Buffett’s framework. I believe this is a sign that we have officially entered the phase where emotional sour grapes will interfere with objective financial analysis of Google. As a result, buying opportunities will arise as negative propaganda affects GOOG.
Does Google face all the classic characteristics of a maturing company? Yes. Will growth slow as the size of the business grows? Yes. Does this make them any less able to make excellent acquisitions, invent new successful products, or continue to dominate one of the most profitable businesses in human history? No. Will Google stay on top forever? Probably not. However, things are still working well and the company continues to mint money. I recommend keeping it on your watch list.
So, don’t let the whining cool kids make you feel insecure about GOOG. The best thing a company (and investor) can hope for is its products to reach the masses and become “uncool” to the infinitesimal indie crowd. Thus, the indie kids can turn us on to the next big thing, but unless that thing goes mainstream, it remains psychological fanfare for the few and a very poor investment for the many.