Peter Lynch Revisited
In one of the best investment books written of all time “One Up on Wall Street”, Peter Lynch discussed the problems that a lot of growth companies encounter as they begin to mature – Deworsification. Deworsification occurs when growth companies start to mature and they turn into cash flow companies. What the company chooses to do with this cash flow is extremely important. In Google’s case they have around $100 per share in cash.So far, in my opinion, Google hasn’t been good stewards of this cash. They make tons of small acquisitions but recently agreed to acquire Motorola Mobility. I’m puzzled as to where this acquisition fits into the core business of Google which is advertising.
The Winds Are a Blowin’
The biggest red flag for me as far as Google spending their cash wisely is the investments they are making in wind farms. They’ve made investments in wind farms in California and even more puzzling is the funding for an underwater ocean grid.
This isn’t a core business for Google…at all. With Motorola Mobility you can at least argue it may help them with mobile advertising but wind farms not so much.
Maybe the wind farm investments are of an altruistic nature but return the cash to the shareholders and let them invest in wind farms should they choose to do so.
Management Issues
Early on in the life cycle of a business it is good to have people at the helm who are visionaries and lead the company towards a future of growth. But once the company starts to mature a more disciplined approach is needed. For awhile Google had this with Eric Schmidt for 10 years. Schmidt helped build the corporate structure needed to see Google along its way. However with Schmidt gone and the founders back running the company it seems as if they are trying to get the innovative entrepreneurial spirit back.
While this is good for a small growing company, it seems to me as if it is causing Google to lose its way a little bit with some of these investments they are making.
The Future of Google
Google is the dominant search engine. They make a lot of money with their pay per click advertising system. This was a great growth engine while the internet was growing and people still had desktop PC’s. But Google hasn’t quite figured out how to monetize the mobile search and make it as profitable and dominate as they are accustomed to.
Facebook is also presenting a challenge for Google. While not a lot of people click on the ads in Facebook, it is eating at the margins of what Google is good at. Facebook has hundreds of millions of “eyeballs” every day and still counting. At some point Facebook will figure out how to monetize ads within its site and could really take a bite out of Google’s dominance.
Investment Conclusion
For me, I’ll just stay away from Google right now until I’m more comfortable with their business strategy and they become more shareholder friendly with their cash allocation decisions.
I don’t think the stock has a huge downside risk (other than market risk) but I don’t see a huge upside either.
Sometimes it’s best just to stay away.