The European Commission said it is worried about the device’s ability to film and record audio of people. Ethical issues encountered by the company could stall plans, as Google Inc (NASDAQ:GOOG) will have to either alter the equipment if it is in fact being used to break privacy laws, or not release the gadget at all. That has major implications for the company’s future revenue-generating potential. However, for the time being, the firm is very healthy and may not need the boost from the Google X project.
However, while those projects look to bring Google Inc (NASDAQ:GOOG) a slew of new revenue if they become mainstream, investors should be cautious. Google trades at about 27.5 times earnings. I am cautious about this because the cost per click in its advertising business is on the decline, and that segment drives the largest portion of the firm’s revenue. About 90% of sales are from advertising, so that makes initiatives with Google X less important, and may only act to inflate the company’s share price. For this reason, I keep Google Inc (NASDAQ:GOOG) out of my portfolio.
Other tech firms watching out for ‘big brother’
A couple Google competitors that are treading carefully due to watchdogs include Apple Inc. (NASDAQ:AAPL) and Samsung.
Apple CEO Tim Cook presented to congress on May 21 to justify his company’s tax strategy. The firm’s subsidiary based in Ireland allows the company to pay a lower tax rate than in the U.S. However, Cook said the firm pays taxes to the U.S. government on revenue that it generates in America.
The presentation to Congress was a very public example of Cook’s ability to realize maximum profits with as little interference as possible. However, his skills have also been needed behind the scenes. That has helped the firm develop the highest return on equity in the computer hardware industry. The company’s profit margin is nearly 23.5%, and it has an asset turnover of 97.8.
But Apple Inc. (NASDAQ:AAPL) needs to expand in emerging markets if it wants to continue growth. The developed world is at near full saturation in the smartphone segment, which means Apple needs a lower priced smartphone to sell abroad. Apple Inc. (NASDAQ:AAPL) is rumored to be working on a $100 smartphone that could be affordable to those in developing nations, and I’d buy shares of Apple now when it is cheap, before it starts to really take hold of that market.
International firms also face regulatory issues
In December, the South Korean government accused the Samsung chip plant of triggering breast cancer in a woman who worked at the factory. The employee had died from the cancer earlier that year, and the accusation marks the second time the South Korean government has connected cancer with the Samsung plant.
Cases involving regulators often result in lower profits for firms, but it is an inevitable component of running a multi-billion dollar business. However, Samsung hasn’t managed to keep a high return on equity when compared to Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL), and poor relations with watchdogs could impact that further.
Aside from health issues with regulators, Samsung has low investor growth expectations, as the firms PE ratio of 8.3 is well below the industry average of 28.1. But that doesn’t mean the firm is necessarily undervalued. In fact, the price to book ratio is at 1.5, which is one of the highest in the industry. The low PE is likely due to the lack of investment from North America, as the company is right up there with Apple in my books. As the only firm to really challenge Apple Inc. (NASDAQ:AAPL) in the smartphone industry, Samsung has what it takes to continue its growth long into the future.
For example, the new Galaxy S4 Active could further challenge Apple, and could be a massive summer hit. The device is scratch-proof, shock-proof and waterproof. That’s the type of innovation that shareholders should expect from a strong tech company, as they look for substantial gains in this stock’s price.
Tech firms have balancing act
Tech companies face a slew of regulatory challenges as they attempt to balance their revenue-generating businesses with government policy. With Apple Inc. (NASDAQ:AAPL)’s Cook quickly diffusing an investigation into his firm’s tax practices, he was able to accomplish that balancing act. Google and Samsung will need to do the same if those businesses hope to maximize their revenue-generating potential, because increased regulation could affect the bottom-line at these firms.
Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG).
The article Tech Firms Need to Watch out for Watchdogs originally appeared on Fool.com.
Phillip is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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