Should Google Inc (GOOG) be Afraid of the Competition?

Google strikes fear into the heart of Microsoft Corporation (NASDAQ:MSFT), and with good reason. On the consumer front Microsoft is facing a number of headwinds. Google’s Android has much greater market share than Microsoft’s smart phone offerings. Also, the adoption rate of Windows 8 appears to be rather depressed. The state of Microsoft in the online search market is not that encouraging. In the last two quarters of 2012 Microsoft’s online services division posted an operating loss of $647 million. This is less than the $973 million operating loss posted in the last two quarters of 2011, but after years of experience in this market it is disconcerting that Microsoft is still unable to turn a profit. The company’s balance sheet is clean with a total debt to equity ratio of .17. Their ROI of 20.0% and ROA of 12.9% are strong, along with their profit margin of 21.7%. Nevertheless, the technology and consumption patterns are changing, and Microsoft’s future prospects are unclear.

Facebook Inc (NASDAQ:FB) is the newest player to come to the party. The company effectively meets people’s need to communicate and share content, but is lacking in other areas. Mark Zuckerberg recently announced the new graph search, which is stirring up major privacy concerns. This new search product is not a wide reaching search engine, but instead is focused on using user’s data in a new way. The news feed offers news and updates but Facebook does not have a serious news product like Google News or Yahoo! News. Like the other firms Facebook has almost no debt, with a total debt to equity ratio of .06. The large growth prospects are constantly touted, but right now the company has an ROA of 1.8% and an ROI of 2.0%. Their profit margin of 6.3% is low compared to the competition. Facebook promises growth and earnings, but Microsoft has tried this for years and is still waiting to turn a profit in their online services division. Facebook’s social network gives the company a unique and powerful asset. Regardless, Google still has a major advantage over Facebook with their dominant position in the search market.

Conclusion

Fundamentally, Google is a strong company. The firm employs thousands of top notch engineers. Coupled with their custom data centers, they own billions of dollars in assets, which make it prohibitively expensive for any potential competitor to try and compete. They have grown their dominant position in search to offer a host of supplementary services which cover almost all of the major reasons for which people use the internet. Android continues to make gains in mobile. Google is a growing company with a wide moat, and as such is a great long term investment.

The article Should Google be Afraid of the Competition? originally appeared on Fool.com and is written by Joshua Bondy,

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