Google: Tune Out The Noise, Buy This Stock

Apr.18.12 | About: Alphabet Inc. (GOOG)

by Jennifer James

Google (GOOG), the search engine and technology corporation, currently trades for $625. Currently, the company is involved in two large-scale lawsuits. One lawsuit is involved with a rival technology company, Oracle (ORCL), and the other involves the U.S. Federal Communications Commission (FCC) issuing the corporation a fine over personal data collected over wireless networks. Additionally, some analysts predict that Google's plans to buy out Motorola Mobility Holdings (MMI) may be blocked by China's anti-monopoly laws.

Google hopes to overcome its current difficulties through its technological innovations. The company recently announced that it is developing a prototype of augmented reality glasses that allows users to access digital information while interacting with their surrounding environment.

Google's current lawsuit with Oracle involves Oracle's programming language, Java. Oracle acquired Java from Sun Microsystems when it purchased the corporation in 2009. Google did not apply for a license from Oracle before it used the Java programming language to create its Android mobile phone platform. According to Oracle lawyers, Google used Java as a foundation to allow developers familiar with the programming language to cooperate to build Android applications. Google opted to not make its Android platform compatible with other Java-based system platforms for sharing information. Oracle contends that Google's unique use of Java for its Android platform required a purchased license. However, Google contends that Oracle's required license for its specific use of Java would only be necessary if it feared a lawsuit from Oracle. The company states that Oracle's copyright suit against it is irrelevant because it did not attempt to replicate the Java programming language. Rather, Google insists that it only used Java to support its Android mobile phone platform.

The case is set to open this week in a San Francisco court with litigation predicted to last up to six weeks. If successful, Oracle could stand to win up to $1 billion in damages and block further development of Android-based mobile phones. Currently, Android application development lags behind Apple (AAPL). Android apps also prove to be less profitable than those from Apple. Some analysts believe that Android's development and profit gap stems from the fact that Apple users download twice as many apps as their Android counterparts.

On top of its recent lawsuit from Oracle, Google also must face the FCC in a dispute involving personal data shared over wireless networks. Google delayed FCC probes into its methods of data collection until it received a report filed by the government organization in early April. Although the FCC-issued fine is miniscule in comparison with Google's $11 billion gross revenue, the incident fuels mounting tension between the company and the general public.

Starting in 2007, Google collected information from wireless networks through its location-based services for Google Maps. The company collected so-called "payload data" that included text messages, e-mail content, passwords, Internet usage history, and other information that the FCC classified as "sensitive." Google stated in 2010 that it would cease all wireless network data collection gathered through Google Maps. The company also said that it mistakenly collected user's personal information through its location-based services. However, consumer information privacy advocates claim that Google's continued violations of user privacy should count as violations of federal "wiretapping" laws.

Nevertheless, Google's information privacy issues do not stop within the United States. The FCC stated that France, Canada, and the Netherlands determined that Google violated online privacy restrictions or laws and regulations similar to those in the United States. I believe that the recent FCC investigations into Google's use of consumer information will negatively impact its public reputation. Although the fine from the FCC is relatively small compared with the company's net worth, Google values its relationship with the public. Any public backlash will potentially affect the company's profitability in the near future.

Additionally, Google faces difficulties in its hopeful buyout of the mobile technology corporation Motorola. Google placed a $12.5 billion bid on the corporation in the hopes of advancing its Android platform. However, Motorola reported that final stages of the deal were held up in China's government bureau that oversees corporate buyouts. China has strict anti-monopoly laws that could prohibit other foreign mobile partnerships. However, financial analysts perceive the delay in Google's business proceedings as China's strategy to convince Google to cooperate with new restrictions on online censorship. I agree with the analyst that in comparison with Google's lawsuits and tensions over online privacy, Google's partnership with Motorola is not a major concern for the corporation. This aspect of Google's business structure should not negatively affect its profitability in the near future.

However, Google hopes to bolster its relationship with the public with a recent announcement on an augmented-reality glasses project. The glasses will incorporate Google technology to help the user interact with its surroundings with the assistance of online resources. For example, the mechanisms in the glasses will help track the user's eye movements while recording video of their surroundings. The glasses will also feature a data overlay courtesy of Google's search engine capabilities based on information gathered from its cameras.

Although many analysts do not view Google's recent technological projects as instantly profitable, they point out that smartphones and tablets were also viewed with skepticism during their earlier stages of development. I believe that the Google prototype of its glasses will aid the company in its recent difficulties with public perception.

Overall, in spite of its difficulties with lawsuits, government oversight, and overseas partnerships, Google still has strong earning capabilities through its targeted advertising income. Reports demonstrate that Google experienced a large increase in revenue from its click-through advertising. The data also showed that Google also profited from advertisements shown through mobile phones that utilize Google as its default search application. Additionally, Google's venture into the world of social networking proves to be somewhat successful; Google+ currently has 170 million registered users.

Thus, while Google faces legal battles with the FCC and Oracle, these are only a sideshow and will not have a material impact on the company's valuation. In my opinion, the company can offset any liability by expanding its ad network footprint through its latest social networking and technological ventures.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.