Don't Let This Tech Stock Weaken Your Portfolio

| About: Alphabet Inc. (GOOG)

The tech industry is often mentioned as one of the highest-growth sectors, with many top performers delivering strong, rapid growth. Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), AT&T (NYSE:T), Cisco (NASDAQ:CSCO), and Amazon (NASDAQ:AMZN) have an enviable reputation in the sector, creating beautifully simple, intuitive products across all device segments. The sector is worth trillions of dollars, with a number of fast-moving companies attracting the attention of investment managers across the board.

One of them, Google, recently announced financial results for the quarter ended September 30th, 2012. Revenue was up 45% year-on-year, and the company earned its first $14-billion revenue in a quarter, an increase of 45% compared to the third quarter of 2011. The GAAP operating income in the third quarter of 2012 was $2.74 billion, or 19% of revenue, compared to GAAP operating income of $3.06 billion, or 31% of revenue, in the third quarter of 2011. Its revenues (advertising and others) were $11.53 billion, or 82% of consolidated revenue, representing a 19% increase over third quarter 2011 revenue of $9.72 billion. Google's revenue from the United Kingdom totaled $1.22 billion, representing 11% of Google's revenues in the third quarter of 2012, compared to the 11% in the third quarter of 2011.

I believe that Google is significantly overvalued based on valuation at its current price around $679 per share, but I also think its stock price could increase in the next few years. While many of its rivals are fretting about competition and decrease in market share, Google executives are excited that at just 14 years of age, the company has recorded a $14-billion revenue for the first time in a quarter.

Android, Google's mobile device platform, sold nearly 105 million units in the second quarter, garnering 68% of the market share and outselling Apple's iPhone. Android, with its open sales model, has 1.3 million activations of its phones per day globally, with the number doubling every six months.

Google also continues its dominance of the internet economy. Its portfolio has grown to encompass more than 150 products - including free, hosted versions of popular software applications. It makes a lot of money on search advertising, creating great customer experience and steady market share growth.

However, Google has problems with competitors. It is involved in a fight with Apple over dominance of the smartphone market. Angry at the success of Android, Apple eliminated Google's applications from the iPhone, replacing them with its own. Google's maps are no longer included in iOS6, neither is a direct link to Google-owned YouTube.

Microsoft rarely masks its hatred for Google, especially since its online division is the only one that consistently loses money, including $2.6 billion lost over the past 12 months. Bing, Microsoft's product, often gets high marks in research that rates the effectiveness of search engines, yet it's Google that captures about two-third of US market share and more than 80% of the global market. Consequently, Microsoft is forced to create a search engine to rival Google. The most recent comScore market share report shows that Bing is making gains in the US, reaching 15.9% explicit core search in July and increasing market share by more than 50% since launch. Microsoft, in its latest attempt to catch up to Google, released an overhaul for its nascent Window Phone software. Unfortunately, smartphones running Google's Android and iPhone sell more than eight out of ten new smartphones in the world.

Google recently announced the launch of a new ten-inch tablets, developed by Samsung, a well-known Android tablet maker. But Google's tablet will have to contend with Surface, Microsoft's first tablet computer produced in-house. It will also have to contend with Apple's dominant iPad lineup.

Facebook (NASDAQ:FB) and Google are involved in intense rivalry. Both rely heavily upon Web advertising to drive their businesses. Facebook has tried expanding into a virtual currency, but for now, advertising is its focus. Google has long been the world leader in Web ads, out-muzzling rivals such as Microsoft and Yahoo (NASDAQ:YHOO) in the past. With so many people who pay for ads on the internet heading to Google and Facebook each day, the goal for each company now is to get them going to their respective sites. In order to achieve that, their business interests will continue to clash.

Google's rivals have a very competitive attitude and deep pockets, but Google does have enough money and drive to take them on. Google can best be compared to companies like Facebook and Yahoo. Its price-to-sales ratio is 4.65, which is competitive when compared to Facebook's price-to-sales at 10.26. Google's price-to-earnings is 21.25, which is unattractive when compared to Yahoo at 5.17. However, it is more attractive than the industry average at 25.55.

But at $679 per share, Google's stock is too expensive based on valuation. This price level seems almost impossible to justify. Investors can buy more revenue per dollar from the S&P 500, since the index has a price-to-sales ratio of 2.02, while Google's stock has a much higher 4.65 ratio. Equity investors must pay attention to how much they are paying for a stock. Valuation matters regardless of how often analysts argue that growth will justify any price. I believe investors should steer clear of Google for now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.