What If Google Is Just a One-Trick Pony?
One of the justifications that Google (GOOG) provided for former Chief Executive Eric Schmidt's move into the chairman role and the reemergence of co-founder Larry Page as CEO was the need to become more flexible by speeding up decision-making at the search giant.
Bloomberg Businessweek magazine looks at that issue in a new cover story on the company, which describes how Google is trying to save itself from "the ossification that can paralyze large corporations." But what if Google's biggest problem isn't a lack of flexibility or the speed of its decision-making, but a fundamental cultural inability to create new lines of business that can keep the company growing? What if it's just a gargantuan one-trick pony?
When asked about this possibility last year, Schmidt effectively said that Google might be a one-trick pony, but it's a hell of a trick (as Oracle (ORCL) founder Larry Ellison once put it). In other words, if you're going to be a company with just one "trick," it might as well be one that has revolutionized the world of online advertising, stolen billions of dollars in revenue from traditional media entities, and pours vast rivers of cash into Google's coffers every month, regular as clockwork.
Obviously, Google is doing pretty well with just that trick—it has a market value of $200 billion and just reported revenue growth of 26 percent for the most recent quarter. Although its search results still need some work (which could cause problems for newly public Demand Media (DMD), even if the content producer disputes this), and there is some competition on the search front from Microsoft's (MSFT) Bing, no one is soon going to be writing the company's obituary.
Questioning the P-E Multiple
But is that enough? It might be if all you want is a company that dominates the search-related keyword advertising business. Google will likely fill that role for the foreseeable future, and that's worth a certain amount—but how much is it worth? Does it justify the price-earnings multiple of 24 that Google's stock currently trades at? Maybe not. This has been the issue with Microsoft over at least the past decade: The company generates huge amounts of cash and is profitable as heck, but what investors are willing to pay for has continued to decline.This is why many have started to ask the question: Is Google the new Microsoft?
Google's biggest problem is that it has consistently failed to produce any new lines of business apart from keyword-related advertising, which still produces more than 90 percent of its income. It's true that—as the company took pains to point out during its recent earnings call—Google is making money from display advertising, YouTube views, mobile, etc. But this is (comparatively, at least) peanuts. The Web giant is famous for giving its employees "20 percent time," and these projects can turn into great services, such as Gmail and Google News—and there's also the company's expanding Android efforts and other initiatives. But do these generate new revenue or profit for the company? To the extent that they help drive search traffic, yes. But that's still just a variation on the same trick.
Even Microsoft has been able to create a new—and profitable—business that wasn't really related to its core software business: namely, the Xbox consumer-gaming system. Google repeatedly acquires companies such as Dodgeball, then smothers them, or fails to take advantage of what they bring to the company, or takes their engineers and makes them do other things. And as a result, it has failed to produce a Foursquare competitor or a Twitter competitor (unless you are one of the five people who use Google's Buzz regularly), and it has certainly failed to produce anything that has a hope of competing against the social-networking wave unleashed by Facebook.
Is Larry Page going to help the company do any of that? No one really knows. But just getting more "flexible"—whatever that means—or making decisions more quickly isn't necessarily going to do it. And it is a growing problem, at least for anyone who is (or wants to be) a long-term Google investor.
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