Google’s wide economic moat
The next step in valuation is to examine a company’s competitive advantage. Is it durable? If not, predicting any growth is pure speculation. So we ask: What core competencies ensure Google Inc (NASDAQ:GOOG) can sustain its position as a market leader?
Warren Buffett once said, “In business, I look for economic castles protected by unbreachable ‘moats.'” In other words, Buffett looks for businesses with a sustainable competitive advantage.
Examining the durability of Google’s core competencies allows us to determine just how wide Google’s moat could be.
Three core competencies give Google enormous advantages in the marketplace:
1.The network effect
2.Size
1.Versatility
With every additional click or client, Google’s platform becomes increasingly valuable to other clients. The same is true for other social platforms, such as Facebook Inc (NASDAQ:FB). This is the power of a network effect; as these digital giants mine enormous amounts of data on users’ interests, demographic profiles, and relationships, they can offer increasingly targeted advertising to clients.
Even better, the network effect benefits users, too. The more people using platforms like YouTube, Gmail, Google Plus, and Facebook Inc (NASDAQ:FB), the more useful and indispensable they become.
Size does matter — especially when it comes to companies with network effects. Fortunately for Google, the company has a mind-boggling lead in digital advertising.
Source: eMarketer.
Google has more than five times the market share of runner-up Yahoo! Inc. (NASDAQ:YHOO). This places competitors like Yahoo!, Facebook Inc (NASDAQ:FB), Microsoft Corporation (NASDAQ:MSFT), and AOL, Inc. (NYSE:AOL) at a significant disadvantage in achieving scale in their network and breadth of reach.
Google Inc (NASDAQ:GOOG)’s size has ensured its dominance and forced competitors Yahoo! and Facebook to think outside the box. Yahoo!’s string of acquisitions since CEO Marissa Mayer came on board about five months ago — Jybe, Stamped, and now Summly — all have something to do with personalized content curation. In January, Facebook Inc (NASDAQ:FB) announced the beta release of Graph Search, a tool giving users a unique way to navigate connections and make them more useful with tailored results.
Source: Facebook press release.
Finally, Google has a valuable and interrelated package of diverse offerings. Each of Google’s services adds value to the others. The result is massive brand awareness and familiarity with Google products worldwide. Just to name a few of Google’s brands, in no particular order:
- YouTube
- Google Earth
- Android
- Gmail
- Google Chrome
- Google Search
- Google Analytics
- Google Maps
- Google Translate
- Google Books
- AdSense
- AdWords
Even Warren Buffett’s business partner, Charlie Munger, praised Google’s economic moat in a May 2009 press conference: “Google has a huge new moat,” said Munger. “In fact I’ve probably never seen such a wide moat.”
An excellent company
Google Inc (NASDAQ:GOOG) is undoubtedly the best in its class and deserving of a premium valuation. But there’s more to valuation than examining a company’s prospects and its economic moat. Investors need to see if the numbers really make sense — something many authors tend to avoid. I provide that missing puzzle piece here.
The article Why Google Deserves a Premium Valuation originally appeared on Fool.com.
Fool contributor Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends Facebook Inc (NASDAQ:FB) and Google. The Motley Fool owns shares of Facebook, Google, and Microsoft.
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