But, is Google a buy?
From a long-term investment perspective, nothing has changed. There’s an explanation for the low income figures. First, mobile monetization remains weak, but Google’s already taking some measures. R&D spending is on the rise, as it grew to 14% in the second quarter of 2013, up from 13% reported in the prior year. Also keep in mind that Google Inc (NASDAQ:GOOG) is constantly launching new products and projects (some of them very promising, like Google Glass and Google Ioon). In the short run, this hurts profit margins, but in the long run, these new projects put Google in a closer position to finding the “next big thing,” just like it did when it chose to develop Android or when it bought YouTube.
That being said, always keep in mind that Google has one of the highest P/E ratios in the industry at 27. Therefore, Google Inc (NASDAQ:GOOG) is by no means a cheap stock and will have to deal with high expectations on a regular basis. This makes the stock very vulnerable to short-term negative deviations, when the company fails to beat the street consensus, like we saw on July 18. Personally, I wouldn’t buy Google at this P/E ratio, regardless of how attractive some of its new businesses look. I would wait for a strong correction to be long Google. This could happen if the company fails to beat the street consensus next quarter for the same reason: weak mobile monetization.
Google alternatives
It’s hard to find an alternative to Google Inc (NASDAQ:GOOG), because most IT companies with low P/E ratios seem to be quite far away from “the next big thing,” unlike Google.
Baidu.com, Inc. (NASDAQ:BIDU) represents an interesting alternative. As the biggest search engine in China, Baidu clearly has some competitive advantages in motion against its main Chinese competitors, and that brings long-run safety to the stock. But Baidu management is also in search of the next big thing. They are not afraid of strategic acquisitions and investments in promising, yet risky, projects. Furthermore, Baidu.com, Inc. (NASDAQ:BIDU) is heavily investing in mobile expansion: as a consequence, it may have the biggest mobile video platform in China. So, what about Baidu’s P/E? At 22, it is also high, but not as high as Google.
Apple, on the other hand, has a much more attractive P/E ratio than that of Google Inc (NASDAQ:GOOG) and Baidu.com, Inc. (NASDAQ:BIDU): 10. But remember that Apple lost a lot of value because Samsung became a strong competitor in the smartphone arena, specially in emerging markets. Samsung is now even stronger, and Apple Inc. (NASDAQ:AAPL) has not taken concrete measures to solve this issue, like launching a cheap smartphone device. Considering also that the high-end smartphone market is way too saturated, and that the iPhone is still driving almost 50% of the company’s value, I see more reasons to be a bear here. However, a low-budget iPhone release or a new innovative product (something more innovative than an iWatch) could change this scenario and that’s why I’m following the earnings scheduled for July 23 very closely. The interesting thing about Apple is that it suffers from exactly the opposite disease Google Inc (NASDAQ:GOOG) does: low market expectations. This is pushing the stock price down but the upside is that as investors expect no major product launches (on the contrary, most of them expect the decline in revenues to continue), it is easier for Apple to beat the low street consensus.
The article Why Google’s Big Weakness Is Mobile and How It Plans to Change That originally appeared on Fool.com and is written by Adrian Campos.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Apple, Baidu, and Google. The Motley Fool owns shares of Apple Inc. (NASDAQ:AAPL), Baidu.com, Inc. (NASDAQ:BIDU), and Google Inc (NASDAQ:GOOG). Adrian 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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