3 Reasons NOT to Buy Google (NASDAQ: GOOG) Stock

In 2004, the idea that a search engine company could trade successfully on the market was questionable at best.

Google (NASDAQ: GOOG) held its IPO just four years after the dot-com bubble, so investors were reasonably cautious about the prospects of the young Mountain View company at the time.

When we look back now, the value of Google almost seems obvious, but we all know what they say about hindsight.

The truth is, you really can’t blame Wall Street for such a gross undervaluation of the company back in 2004.

After just 10 years on the public market, Google, Inc. has evolved into the fourth-largest firm in the world. Originally valued at just $23 billion, the company’s $356 billion market cap now rivals the likes of Exxon Mobil (NYSE: XOM), Microsoft (NASDAQ: MSFT), and Warren Buffett’s Berkshire Hathaway (NYSE: BRK).

In its decade of trading, Google’s performance on the market was beaten by just nine other stocks during the same period. An idle $10,000 investment at Google’s IPO would have banked you well over $100,000 today.

The Worst Best-Performing Stock on the Market

Google is no doubt one of the most successful companies of all time. In addition to its top-10 stock performance, Google has:

• Commanded a dominant share of Internet ad revenue since the early 2000s.
• Padded its balance sheet to a whopping $58 billion.
• Grown its top line to $68 billion.
• Maintained robust profit margins at 20%.
• Established brand recognition on par with Apple and better than McDonald’s and Coca-Cola.

Yet if you were to ask me what I think about owning shares of Google, I’d tell you to put your money elsewhere.

Despite the massive success and endless possibilities of the company, I wouldn’t touch it with a ten-foot pole.

Here are three reasons why…

Reason #1: Confusion

When asked about his position on Google and Apple in 2012, Warren Buffett stated he wouldn’t be surprised to see them be worth “a lot more money” in a decade. At the same time, though, he pointed out that he wouldn’t buy equity in the companies, either.

Warren’s reasoning for this is simple. “We couldn’t predict what would happen to [Apple and Google] 10 years ago and we can’t predict what will happen to it 10 years from now,” he said, later admitting, “I just don’t know how to value them.”

This idea of only investing in what you can predict in the long term fits Buffett’s classic buy-and-hold strategy quite well. Berkshire can only grow by making large plays, so it makes little sense for the company to take speculative positions.

And while I believe the modern market requires a more dynamic mindset than during Uncle Warren’s time, I can’t help but agree with his stance on Google here.

Ten years ago, Google was easily defined as a search engine company. Today, the market isn’t quite sure what it is or what it’s going to be.

Over the last decade, Google has made acquisitions in robotics, artificial intelligence, mobile phone manufacturing, satellites, and home automation, just to name a few industries.

For the rampant speculator, this is great news. In the future, Google could be selling driverless cars, providing robotic servants, or plugging you into the Matrix. But for everyone else, Google’s future is just as uncertain as it was in 2004.

Google’s ambitious projects may very well turn out to change the world, but the reality is that in terms of generating alternate revenue streams, the company is grasping at straws right now.

Reason #2: Mobile Slump

One of the most important things to realize about Google is that virtually all of the company’s revenue has relied on a single product: Web search. Without Web search, Google would lose the eyes and data of consumers and eventually collapse.

To be clear, there is a distinction that needs to be made between the Web and the Internet. The Internet encompasses the entire spectrum of connected devices and networks. The Web only covers what you see on your desktop browser.

So here’s the problem for Google: The company is trading at a trailing P/E of 27.61, which means the market is banking on significant growth. But that growth is starting to come to a halt.

Not only is Google’s ad revenue growth dropping…

But its desktop search traffic is also falling off…

And mobile is taking over the industry.

Further, within mobile, people are spending more time on apps and less time on the Web:

Altogether, this means Google is no longer the growth play it once was, and it will need to find alternate streams of revenue to justify its current valuation.

The obvious strategy is to monetize mobile better, but Google’s ability to accomplish this is questionable. Not only does the company get significantly less per mobile click than it does on desktop, but it’s no longer growing its share of the market.

With Facebook and Twitter coming up quickly from behind, Google has lost mobile ad share for the last two years. The company may still be growing revenue, but it’s slowly slipping off the throne as users migrate to alternative ad streams like mobile apps.

Reason #3: Saturation

The third reason you should avoid Google stock is the simple issue of saturation. Google is already 87% held by institutions and, as mentioned earlier, is one of the top-recognized companies in the world.

Smart money’s interest here is close to the brim, and just about every retail investor already knows about Google.

In other words, the collective pocket of interested buyers is shallow, and Google is far more likely to top than to have another repeat of the last decade.

Until next time,

Jason Stutman

Check us out on YouTube!