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

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.

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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

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?

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 eMarketer.com, 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

Given Google's strong competitive position, and its growth opportunities, I don't think that the price/earnings ratioof 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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