Is Google A Good Stock To Buy?

| About: Alphabet Inc. (GOOG)

By Steven Edwards

Google Inc. (NASDAQ:GOOG), the company, was named for the mathematical term googol, which is ten to the hundredth power, a number far beyond the ability of most people to fathom. Founders Larry Page and Sergey Brin must have known what they were about, for the company that they started has become so large and so diverse as to be unfathomable.

The word "google" has also become lowercase, as in the verb to google, meaning to search the Internet. Google, the company, is first and foremost a search engine, the best in breed. As such it competes with other search engines, like Yahoo's (NASDAQ:YHOO) or Microsoft's (NASDAQ:MSFT), but Google has a commanding 65% market share in terms of use.

Of course, I use Google's search engine every day and have never paid a dime for the service. My searches and yours are paid for by advertisers, mostly by ads that are sometimes even relevant to the searched item. No doubt, Google also collects all sorts of data on who is searching for what, and that kind of information has value to all kinds of people, not least of all to Google's management, as it plans its long-term strategy.

Google is also involved in social media with its Google+, which occupies a niche somewhere between LinkedIn (NYSE:LNKD) and Facebook (NASDAQ:FB), but so far has a pretty dismal market share in terms of user-hours, or in Google's ability to monetize it.

Google is also known for its Android operating system for mobile devices, which powers most of the smart phones that are not either Apple's (NASDAQ:AAPL) iPhone or Research In Motion Limited's (RIMM) fading Blackberry. Right now, Android phones are actually made by other companies, particularly by Samsung (KRX: 005930). Samsung makes three times as many phones as Apple, more than half of which are now smart phones, according to Gartner.

But Google completed its acquisition of Motorola Mobility in July of this year and wasted no time in announcing a 20% layoff of workers. It is expected that the slimmed-down company will offer a slimmed down-line of phones, mostly, if not exclusively, Android models. How Google handles its other partners, like Samsung, is an open, and it would seem, very sticky question. It's like Microsoft deciding to build PCs to compete with its customers, something they have never done.

The new Google phone will go head-to-head with Apple's iPhone, both companies controlling their own hardware and software. Nor are phones Google's only foray into hardware. It recently launched the Nexus 7, a tablet focused on Google Play, an online Apple Store-equivalent with a whole collection of Googlized apps, books and games. Not content with its Internet gigs, Google is setting itself up to be a full -fledged rival to Apple. This won't be like the civilized PC vs. Mac days, with polite little digs at each other in funny commercials. This will be a high tech, high stakes, scorched-earth rivalry for world dominance between two giants, with plenty of money lavished on lawyers and politicians.

Should be fun. Pass the popcorn.

Most companies would have enough on their plate by taking on Apple, but Google has a lot more planned. For instance, it recently bought Frommer's line of travel guidebooks to go along with the previous acquisition of Zagat Survey, which is an ongoing review of hotels, restaurants, etc. around the world. And of course Google already does maps, so eventually Google plans to be your one-stop trip planning and travel company, like say Incorporated (NASDAQ:PCLN), the other member of NASDAQ's 500+ stock price club, along with Apple and Google.

Google also does a lot of other things. For instance, it is a solar power and a wind power company. It is a broad band internet provider, using high speed fiber optics. It is a cloud computing company. Of all things, it is developing self-driving technology for automobiles.

Despite all of its weird diversity, according to its 2011 annual report, 96% of Google's revenue came from advertising last year. So the phenomenal success of Google's search engine is being used to finance diversions in all directions. By contrast, its soon-to-be main competitor, Apple, gets almost all of its revenue from selling STUFF. Google will have to learn how to make money from consumers, not just advertisers.

Google can't be called expensive. Its current price-to-earnings ratio of about twenty compares to a five-year growth rate in earnings of 24.5%. Its operating margins and profit margins are still impressive, but my concern is that it cannot last. Growth in advertising revenues will eventually slow down, as most of the world is already connected to the web. The company will have to start showing a profit in its new ventures, but the upcoming collision with Apple is likely to put pressure on margins for both companies.

Lots of investors love Google - 115 hedge funds have positions in Google; it is their second most popular stock, after Apple. I love Google's search engine, I love Google Earth, I love Google management's sky-is-the-limit attitude. I wish them success. What I don't love is Google's stock right now. I think their various initiatives will certainly drive down their profit margins, at least in the near term, and all those hedge funds will start bailing.

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

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