Is It Time to Buy Google Shares?

googlestock2008Eric Schmidt is fond of saying it would take Google 300 years to achieve its goals. I always thought he must have been at least partly joking. The shelf life of Internet companies is short; it’s taken Yahoo and eBay little more than a decade to reach what appears to be their respective “best-if-used-by” dates.

And judging from the way investors have been treating Google’s stock, you’d think it was also on track to face an early downgrade from Internet giant to also-ran. After hitting an all-time high of $747.24 a share in November 2007, Google’s stock slid to as low as $247.30 a week ago — a 67-percent drop (the shares closed at $292.96 in a shortened trading day Friday). True, most stocks have suffered from widespread selling, but consider that rival Microsoft is down about 50 percent from its 2007 peak.

There is plenty of reason for concern in the short term. Google’s bread and butter is still online advertising, which is looking to be more vulnerable to a downturn than many initially thought. And it still hasn’t cultivated any rich revenue streams outside of search. Word of widespread contract worker cutbacks only add to that image of a giant on the ropes.

But there are signs that Google is growing slowly more integrated into many facets of our online experiences. Its market share in search expands slightly each month. Chrome is proving a bigger hit than the first reviews intimated. Google’s mail, chat, calendar, maps and feeds are becoming incrementally more useful. You may not be using all of them, but chances are you are using some of them more than you used to.

That’s because Google has been tweaking many of its far-flung offerings with new features and/or better performance. Not just Chrome, but video chat, and voice search on mobile devices. They don’t have to be perfect — and often fall short — they need to be just useful enough to steal our attention from a rival’s service.

Is Google making more money from these micro-innovations? Usually not. But they have a value that could last long after the next financial quarter. They foster loyalty, nibble up market share, and — most importantly — observe user interactions so that Google can be even more useful to you tomorrow.

The New York Times’ David Carr this week detected a larger pattern in all these micro-innovations. Confessing that he was at once seduced and creeped out by how useful Google’s programs were, he nonetheless concluded:

“Google’s Web platform, in all of its high-functioning glory, is its marketing.… If Google owns me, it’s probably because I am in favor of what works.”

When ad spending recovers, Google is going to have more ways to spread it around in front of us, and take up even more of our attention spans. But it’s not content with that, prodding its tentacles into other areas such as energy conservation. Schmidt recently spoke about the company’s early efforts to help make energy usage more efficient. Again, it’s not clear how Google would or could monetize it, but its influence in an area of changing demands is notable.

Does that make Google under $300 a bargain? In the long term, quite possibly. Remember when Google went public at $85 a share and people said its P/E of 58 was too high? Google’s 2008 P/E is now 18. And while Google’s profits are growing much more slowly, they are likely to be growing for years.

Google executives have long acted blasé about its stock price and investor obsessions like profit margins. Still, when a stock loses 67 percent of its value in a little more than a year, it has got to be worrisome for workers holding options. And so there may be a couple of stomach-churning years ahead for Google.

After that? The subtle moves Google has been making with an eye on long-term growth could lead to bigger payoffs for years to come. Maybe not 300 years, but certainly into the next decade or so at least.


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