Shares of Google Inc (NASDAQ:GOOG) recently rose about the $800 level, hitting new all-time highs as bullish analysts started to claim that $1,000 per share may not be too far away.
But this isn’t a gushing, bullish love letter to Google Inc (NASDAQ:GOOG) – the Internet is filled with enough of those already. In this article, I’d like to discuss three things I absolutely hate about Google. Whether or not these three factors will impact the company’s earnings in the near future is debatable, but in my opinion, they are three major problems that investors should pay attention to.
First Problem: The Motorola Mess
Google’s $12.5 billion acquisition of Motorola Mobility in May 2012 was a terrible move. The acquisition, which was made to strengthen its patent portfolio against Apple and Nokia, has weighed on the company’s margins and caused expenses to rise all throughout 2011 and 2012.
Last quarter, Motorola Mobility generated $1.51 billion in revenue, but post a net loss of $353 million. Google Inc (NASDAQ:GOOG) now intends to cut 1,200 jobs at Motorola, in an effort to stem its losses – which will cause the company to incur some heavy severance costs in the coming year. Google also doesn’t plan to heavily expand Motorola’s hardware offerings, given the crowded state of the market – making Motorola nothing more than an overpriced insurance policy against patent litigation.
Second problem: Vulnerability to Facebook Inc (NASDAQ:FB)
Despite Google Inc (NASDAQ:GOOG)‘s best efforts, the company still doesn’t hasn’t made a dent in social networking. Google+ has 265 million active users, less than a third of Facebook Inc (NASDAQ:FB)’s 1.06 billion active users. Despite Facebook’s saturation levels, it is still rapidly growing, and is supported by the rapid adoption of mobile devices such as smartphones and tablets. In most countries, Facebook is a staple application on Android, iOS and Windows Phone devices. The same can hardly be said of Google+, which is a virtual ghost town by comparison.
What Google is failing to understand is that people only need one social network for sharing updates, photos and videos – and that network is going to be the one all their friends and families are subscribed to – Facebook Inc (NASDAQ:FB). Uploading the same photos or videos to Google+ is redundant, and while most people who have a Google+ account also have Facebook, not all people who use Facebook are on Google+.
Facebook Inc (NASDAQ:FB) also has an edge with its omnipresent “Like” buttons on external websites, which allow users to instantly share links with friends. Shared login systems, which allow users to use their Facebook credentials to access third party websites, also help the company gather information about user preferences.
Therefore, Facebook Inc (NASDAQ:FB)’s recent release of Graph Search could be the killer app that seriously wounds Google. Graph Search allows users and advertisers to input intelligent social searches, such as, “Show me Mexican restaurants that my friends have visited in the past year.” Graph Search aims to give users more personalized search results than standard queries on Google.
Graph Search could also make it easier for advertisers to create targeted advertisements for certain demographics, by checking off a checklist of desired social criteria. The possibilities become tantalizingly endless for prospective advertisers.
In the end, that’s Google Inc (NASDAQ:GOOG)’s weakness in social networking – it still approaches the Internet as a top-down search, just like Yahoo! Inc. (NASDAQ:YHOO) and Microsoft Corporation (NASDAQ:MSFT)‘s Bing. Meanwhile, Facebook Inc (NASDAQ:FB) has infiltrated the Internet from the inside, and is gathering individual interests and forming them into a searchable database by expanding across a web of social connections. That “inside out search engine” could seriously hurt Google in the long run.
Third problem: Google hates its shareholders.
Google is also notorious for its dual class system of stocks. One one level are the founders’ shares, which are worth ten votes each and cannot be purchased by outside investors. On the second level are common shares for retail investors and employees, which represent a single vote each at over $800 per share.
Last year, Google Inc (NASDAQ:GOOG) announced that it would split its stock in a nontraditional way with to preserve the power of its main executives: CEO Larry Page, co-founder Sergey Brin and chairman Eric Schmidt.
Google planned to split its typical Class A stock into two – a Class A share with voting rights and a Class C share with no voting rights, both worth half of the original stock’s price. What that means is investors will get twice as many shares at half the price, with the same voting rights as before.
For investors, nothing has changed substantially – they still have the same amount of capital invested, although in twice as many shares at half the original price. They still retain the same voting rights with Class A shares. However, for employees of Google and some new investors, they will be assigned Class C shares – with no voting rights whatsoever.
What this means is that the Google Inc (NASDAQ:GOOG) triumvirate will be able to increase the amount of non-voting shares while preserving the same amount of voting ones – thus making it possible for them to sell their shares without losing any voting power, as well as issue new shares without increasing the voting power of existing shareholders. In addition, Google shareholders will never be able to claim more than 50% of the company’s voting rights.
Consider what that means for shareholders – any project or strategy that Larry Page is keen to pursue or abandon will go unchallenged. Do you think that Google Glasses, driverless cars or wind farms aren’t good investments? Do you think that Google Inc (NASDAQ:GOOG) was wrong to leave China in 2010 and surrender its most important market to Baidu.com, Inc. (ADR) (NASDAQ:BIDU)?
Too bad – Google doesn’t really care what you, the shareholder, thinks. Not even top institutional investors will be able to challenge or sway the company’s often erratic decisions.
Bottom Line
Make no mistake, Google is a spectacular growth stock that will probably head even higher this year. However, Google is far from invincible. Motorola’s losses, a glaring vulnerability to Facebook and a rigid, anti-shareholder stance are three things I hate about Google. They might not sink the stock, but they are important enough to pay attention to, since they are the things most likely to sneak up on Google Inc (NASDAQ:GOOG) and bite shareholders when they least suspect it.
The article Three Things I Hate About Google originally appeared on Fool.com and is written by Leo Sun.
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