Google has made a huge mistake – but it’s still a buy

Google: missed out on social media

Google chairman, Eric Schmidt, gave an interview to Bloomberg a couple of days ago.

He talked about his predictions for 2014. But perhaps more interestingly, he admitted that his biggest mistake at Google was to miss one of the biggest technology trends of all – the rampant rise of social media. That mistake has left Google a long way behind Facebook in the ‘social space.’

I’m a Google shareholder. So I wish Schmidt hadn’t made that mistake.

Advertising is Google’s bread and butter. Social media – which involves people communicating directly with their friends and peers over the internet, and so creates a far more detailed picture of their likes and dislikes – is of huge interest to advertisers.

But that said, I have no plans to swap my Google shares for Facebook ones. In fact, even though Google’s market cap has doubled to an extraordinary $370bn in just 18 months, I still think the valuation looks very reasonable – here’s why…

Google is still way ahead of Facebook

The most important point about Google is that it offers a fantastic service to advertisers. I can’t think of a better place to advertise than on a search engine results page.

And as Richard Waters points out in the FT, this market is still growing. According to Goldman Sachs, about 2% of the global advertising market moves to the internet each year. And about half of that business goes to Google. Given that online advertising currently comprises around 20% of total advertising spending, there’s plenty of potential for future growth here.

What’s more, Google may be able to drive revenue even higher by tweaking the algorithms that govern its search-advertising formula. Anders Bylund of The Motley Fool is optimistic: “The latest round of nips and tucks should drive Google’s revenue and gross margin higher in 2014, as advertisers can build ever more pinpointed marketing campaigns… I’m not sure if Wall Street analysts have taken the latest ad tweaks into account, so it wouldn’t surprise me to see Google shocking the Street in 2014’s earnings reports…”

In other words, the current profit forecasts from Wall Street analysts may prove to be too conservative.

But what about mobile advertising? Isn’t that an area where Facebook will end up as top dog?

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Well, mobile advertising is certainly growing fast, and I don’t doubt that Facebook can capture a decent slice of this fast-growing pie. But right now, Google is clearly still the boss. Google has 49% of the US mobile advertising market, according to, way ahead of Facebook on 17%.

Granted, Facebook can acquire valuable information on an individual’s likes and dislikes, which can help advertisers to target their campaigns effectively. But that doesn’t mean internet search is going to disappear. Many web browsing sessions will still begin with a Google search, and the opportunity to advertise on that search page will continue to be very attractive.

Remember also that Google’s Android operating system is used in the majority of smartphones, which will help Google defend its lead in mobile advertising.

In fact, when I look at Google and Facebook, I think that Facebook is far more vulnerable to challenges from young businesses. Twitter and Snapchat are both picking up Facebook users in the social space, but I don’t think that anyone has that kind of disruptive potential in search-driven advertising.

Clearly, advertising is hugely important to Google, comprising around 85% of its revenues. But the company is also making good progress in other areas. The Chromebook laptop, for example, is starting to make real headway. It now accounts for almost 10% of US commercial computer devices sales. That puts Chromebook sales ahead of Android tablets, according to market research firm, NPD Group.

You can’t use Microsoft software on the Chromebook, so this product is also a great opportunity for Google to persuade its customers that Google’s software is just as good as anything produced by Microsoft or Apple.

Google’s not a bargain, but it’s still a buy

I said in October that Google looked cheap at $1,000. The share price is now up over the $1,100 mark, but even now, I don’t think the valuation is unreasonable. Revenue is expected to grow by 40% in 2013, and by a further 16% this year. And, as we’ve already seen, analyst forecasts for 2014 may be revised upwards.

Given Google’s strong competitive position, and its growth opportunities, I don’t think that the price/earnings ratio of 21 for this year is ridiculously expensive either. The company may not be a bargain anymore, but it still looks a decent investment.

I have no intention of selling my shares. And if you don’t own any, I think now is a perfectly reasonable time to buy.

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4 Responses

  1. 03/01/2014, Bearish Bulldog wrote

    Google hasnt just made one big mistake… they have lost and are losing money in every market they go into.. look at Android, given away free which wont cover big R&D costs

    Now they are subsidising their falling Ad Revenue model with previous years profits!!

    I dont know where on Earth Mr Bowsher gets his happy pills (on Google) but they must be very good.

    Apple have just mullered them in Mobiles and about to do the same with Microshite in laptops and PCs.

    All aboard the Good Ship Apple… rats leaving a sinking ship at Google, the shareprice is totally delusional to the underlying Google biz model and their constant blood loss in market after market

  2. 03/01/2014, Mythic wrote

    Suspect you might be right. Whilst Facebook is profitable these days they will become “uncool” as they seek to make sure the business is monetised on a consistent and sustainable basis.
    Not sure Bearish Bull isn’t on something equally weird to that which he accuses Ed of taking, Apple is going to come under increasing fire from less expensive rivals on various fronts, as people begin to realise they do not need to buy an new over priced piece of kit every five minutes Apple will get drawn into price competition and their share price is steadily climbing it’s second wall of over optimism. Google’s up cock after up cock could be seen as a series of misguided efforts to diversify their model, or as a glass half full observer might reflect, it could be they are merely tenacious in their efforts to bolster the future. Sometimes you have to kiss a lot of frogs.
    You can only bleed a customer base for so long, I am sure Apple will learn this in time.

  3. 03/01/2014, Anzac-Abroad wrote

    Once advertisers do a little more detail work on the actual Cost Per Acquisition (CPA) via Google on non branded terms, like [Cell Phone Plan] rather than [Sprint] they will see that in many areas the CPA is extremely high due to the participants in the auction not fully understanding their financials. As an auditor within the advertising space I see on a daily basis, HUGE CPA’s such as $4000 for a cellphone plan that has an LTV of $2400. Due to the immaturity of measurement, and advertisers blending the very chap CPC of their branded search terms with non branded generics, this is not being identified across the board. I’m not saying I wouldn’t hold or buy Google stock, but I would be cautious on the underlying financials of their adwords model which is due to auction dynamics overpriced. Lord Levehulme said 50% of my advertising is wasted, I just don’t know which 50% !!. This is not to say that many other forms of advertising are not wasteful, just that once the market catches up, many big advertisers will adjust bids downwards to achieve profitable CPA’s. Before that happens Google is diversifying into Local, Mobile, Social etc as both core to mission but because any decent economics major working in the data will have seen what I have.

  4. 08/01/2014, NicoleH wrote

    While I agree that Google’s half-hearted attempt at a social channel I disagree with the idea that it’s a “sinking ship”, as commented above. In fact I find that a ludicrous thought! Google is EVERYWHERE in EVERYTHING we do online (well, almost everything!). A slightly underhand tactic to boost Google+ is that marketers, businesses and writers now have to use Google Authorship to claim their work and improve SEO. Very few people actually enjoy using the platform, and it’s in desperate need of an overhaul, but this is Google’s way of ensuring it isn’t pushed out of the social market.

    This is a good read about what I call “Googleisation”:

    Nicole Healing

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