Sharing
Google Inc (NASDAQ:GOOG)’s dominance in search and online advertising was built on creating cutting edge technology and letting others piggyback for a small fee. Adwords is a prime example, since anyone can start a targeted online advertising campaign at a reasonable price. The company’s Android mobile operating system is similar. Google Inc (NASDAQ:GOOG) designed the OS and lets others use it for free. It takes a cut from app sales and has cemented its position in the mobile market.
That said, as Google Inc (NASDAQ:GOOG) moves into new areas it is increasingly taking on new competitors and old friends. For example, Google recently purchased Motorola Mobility. While it claims the target was Motorola’s patent portfolio, Google is now in the handset business. The Moto X is already being primed for launch.
With partners like Samsung Electronics Co., Ltd. (KRX:005930), the only real competitive threat to Apple Inc. (NASDAQ:AAPL), using Android, getting involved in handsets is a risky move. It could open the mobile OS market to companies like Microsoft Corporation (NASDAQ:MSFT), which recently relaunched its Windows Mobile OS.
New Products
So far, Google has reached into mobile phones, wearable devices like Glass, and netbooks, though it is using a partner model in that space. Now the company is rumored to be making a watch and game console, both of which are key products for competitors and partners.
This is a big issue and an important one to monitor. For example, competitor Apple Inc. (NASDAQ:AAPL) was sure to include Google’s search as the default on its early iPhones. However, Microsoft Corporation (NASDAQ:MSFT)’s Bing is set to displace Google as the search tool for the Siri computer assistant. That may seem small, but Apple Inc. (NASDAQ:AAPL) has also tried to displace the Google Maps app.
Every chink in the armor weakens Google’s market position. The mobile market is probably one of the biggest issues. Google doesn’t dominate mobile ads like it does Internet ads, which has translated into lower mobile margins. This is the growth business right now. Getting Android to be the brains behind smartphones from companies like Samsung has given Google an industry-leading position since Android phones far outnumber Apple Inc. (NASDAQ:AAPL) phones.
However, if Google is making phones, then its partners have to be thinking about finding a new mobile OS supplier. Even though there won’t be a wholesale shift away from Android, letting a third player into the market is a big risk. That third player increasingly looks like Microsoft Corporation (NASDAQ:MSFT), which received high marks for Windows Mobile in Nokia Corporation (ADR) (NYSE:NOK)’s Lumia phones.
Expensive
Google shares are trading with a trailing price to earnings ratio of around 27. Although that’s not outlandish, it indicates that investors are pricing in high expectations, and the shares trade near all time highs. The problem is that the company’s profit margins have been shrinking over the last two years, going from around 35 to 25 last year.
That’s a big change. If the company’s impressive top-line growth slows, tighter margins could quickly show up as bottom-line weakness and investors could jump ship.
Game System
Microsoft Corporation (NASDAQ:MSFT) and Google are already major competitors, adding a game console would just heat up the battle even more, since Microsoft Corporation (NASDAQ:MSFT) is set to release an Xbox update this year. Breaking the dominance of Microsoft Corporation (NASDAQ:MSFT), Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY), and Sony Corporation (ADR) (NYSE:SNE) in the game space won’t be easy, and it will likely ramp up Microsoft’s efforts to fight Google in other areas.
Microsoft’s lagging mobile performance has been a drag on its shares, but investors appear to see improvement there and have been jumping back in. Moreover, Microsoft’s PE of around 19 is far more reasonable, particularly since the company’s top-line has again started to head higher. And the 2.6% or so dividend yield provides a floor for the shares that Google’s dividend-less stock lacks. Growth and income investors should definitely take a look, though growth investors might prefer it to Google, too.
The Cheapest Option
Apple Inc. (NASDAQ:AAPL), however, might be the best bargain of the trio. Revenue growth over the past decade has been nothing short of amazing, with earnings traversing a similarly impressive trajectory. And, margins have actually been growing over the last few years. Although that can’t go on forever, even if margins plateau in the 30% range (down five percentage points from the 2012 tally), they will be notably better than Google’s.
And, investors concerned about the company’s ability to continue growing the top-line have punished Apple Inc. (NASDAQ:AAPL) shares. It now trades at a PE of around 10. That puts Apple in value territory. Add in a 2.9% or so dividend yield and growth and income investors should be looking to jump aboard.
Watch Out Google
Google faces notable risks, many of which are of its own making. Entering into more head-to-head competition only increases the risks. Investors looking for alternatives to high-priced Google shares should consider Microsoft’s rebounding mobile fortunes and Apple’s notably cheap shares.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article This Tech Giant Is Taking on the World originally appeared on Fool.com is written by Reuben Brewer.
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