Powerful Search Engine Stocks To Consider Now

by: IncomeHunter

There is a lot to like about Google (NASDAQ:GOOG). It is the western world's dominant search engine and a booming online advertising business. It produces various ancillary revenue streams, and has a growing role in the creation of cell phones. It also has a "coolness" factor, ensuring its ability to effectively recruit engineers and other talent. However, its ubiquitous presence has the company facing increasing civil and administrative suits. One example of this is Google's recent court loss to Vringo (VRNG) of $30 million plus royalties into 2016 on a patent claim. But the company's stock market capitalization has fallen by about $35 billion in the past month. Something must be at work.

The reason behind much of the decline was a disappointing third quarter financial report. Google reported adjusted earnings of $9.03 per share, far off the $10.65 that had been expected. The main culprit in the earnings failure was Google's decision to become more hardware focused, as evidenced by its May 2012 acquisition of Motorola Mobility. On top of this, Google's series of laptops, despite exceptional pricing, have largely failed to gain customer acceptance.

Being on top of its market for so long, Google is a target in all sorts of areas. It has potentially billions in tax debt in Great Britain. Domestically, the Federal Trade Commission is wrapping up an 18-month investigation into unfair trade practices. But the company's core advertising and search functions are rolling right along, and Google has a stellar balance sheet. The recent price drop has pared its PEG down to 1.25, and if you, like me, are a fan of Google, now is a great time to buy.

Microsoft (NASDAQ:MSFT) to me is one of the most puzzling companies out there. No matter how much it earns, and no matter how strong its balance sheet, its stock has gone pretty much nowhere the past 15 years. With its software powering the operating system and basic applications of the world's computers, its popular gaming system (Xbox), and its growing search engine, Bing, Microsoft would seem to have its world in order.

Microsoft has had a rough few days. Another of the seemingly endless strings of patent suits is underway in Seattle between it and Google's Motorola unit. And, the head of its Windows operating system, Steven Sinofsky, is leaving the company.

But the bigger problem for Microsoft is that fewer personal computers, and more tablets, are being sold, and many of those tablets utilize Google's Droid operating system. The new Windows 8 operating system is supposed to be more tablet friendly, yet Google's system is licensed at no cost to hardware makers, a powerful incentive for tablet makers to choose the Google system.

Microsoft still has a sublime balance sheet, but is a single-digit growth company. It pays an above average 3.2% dividend yield, and is a good choice for the conservative, income-oriented investor.

Yahoo (YHOO), the stodgy, old search engine and general information site, is seeking to become more relevant again. To further that, this summer Yahoo hired Marissa Mayer, former executive and key spokesperson for Google. Under her leadership, management has been reshuffled, and Yahoo has entered into agreements with the likes of Samsung (OTC:SSNLF), CBS (NYSE:CBS) and others. But the company will need time to really turn around and grow. It has bought some time with its shareholders with its third quarter sale of a large stake in Alibaba. Absent that, and Yahoo's earnings would have pretty much continued along the flattened path where it has been in recent years.

Yahoo is awash in cash due to the Alibaba sale, and $3 billion of that cash will be going back to shareholders. Those shareholders must hope that Mayer's touch will lead to improved core earnings going forward. I for one, will believe it when I see it.

The leading Asian Internet search company is Baidu (NASDAQ:BIDU), which has been a bona fide juggernaut in recent years. It has averaged a shocking 88% average annual earnings growth rate the past five years, a rate that ultimately is unsustainable. In the third quarter, it posted earnings of $1.37 per share -- a 60% jump from the third quarter of 2011 -- and it was also about 7% above analysts' expectations.

The slowing of the Chinese economy, along with increased competition both from Google and from other Chinese language sites -- especially QiHoo 360 (NYSE:QIHU), which just began offering web search services in August -- will bring down Baidu's growth in the fourth quarter. Also impacting Baidu going forward is that as more Chinese, like Americans, utilize smartphones and tablets for their web searches, advertising revenues on a per search basis will decline. Few things are more important to Baidu than effectively monetizing the mobile search market. Management has indicated it expects top line growth to "only" grow 40% in the fourth quarter versus its year ago period.

On the bad news, or more accurately, threat of bad news, Baidu stock has plummeted over 33% since May, driving down its price to earnings ratio to a reasonable 24, and its PEG to a miniscule 0.57. When one considers that even a slowed Chinese economy is still growing three times faster than the domestic economy, this is a fine opportunity to invest in Chinese infrastructure at a reasonable price.

The trick in America for third parties to use domestic search engines to their advantage is to get some help. There are companies that work on placement within Google and Yahoo type searches, such as Tasty Placement. But another aspect of Internet commerce is securing a positive reputation. Many companies have suffered because of negative comments that have spread like wildfire on the Internet. ReviewBoost is a privately held company that specializes in the positive portrayal of its clients on the web. The company won the San Diego area's "Outstanding Emerging Business of the Year" from the regional Chamber for 2012, and currently has over 4,000 clients. ReviewBoost works with local businesses to survey its customers and collect honest feedback in the form of a review.

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.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here