Understanding the Key Threats to Google (GOOG) Stock

Google Inc. (Nasdaq: GOOG) has grown to be the fourth most valuable U.S. company, with a market capitalization of $370 billion.

Only Apple Inc. (Nasdaq: AAPL), Exxon Mobil Corp. (NYSE: XOM), and Microsoft Corp. (Nasdaq: MSFT) are larger. In 2015, the company will likely generate more than $60 billion in revenue and more than $17 billion in net income.

Analysts expect it to continue growing at 15% to 20% for the foreseeable future despite its increasing size, a growth rate rivaled only by Apple among mega-cap companies.

That rate of growth continues to get more tightly squeezed...

Asking Forgiveness Rather Than Permission Has Its Price

The company has come a long way since it began as a research project by Larry Page and Sergey Brin, two Stanford University PhD students in 1996. The company went public on Aug. 19, 2004, with the official mission statement: "To organize the world's information and make it universally accessible and useful."

Even more impressive than its economic might, however, is the enormous influence that Google exercises over the mind of the Internet.

Google's search engine effectively functions as the Internet's DNA. It provides the company with the ability to influence the flow of information and access to that information. Google Search is the dominant search engine in the U.S., with two-thirds of the market. Its search algorithms have been both praised and lamented for the combination of ingenuity and potential for misuse.

Google has followed the philosophy that it is better to ask forgiveness than permission in advancing its interests. It has expanded into the email business through Gmail, into the apps business through Google Apps, and into countless other businesses through both internal development and acquisition (YouTube as one of its most famous).

The company has also spent research dollars on futuristic projects like robotics and self-driving cars. Research projects such as Google Maps have changed the way we view the world. In short, Google exercises an enormous influence over the global mind.

The company's unofficial motto is "Don't be evil." Some governments, however, are not so sure that the company is living its mantra.

European governments are now starting to push back. A proposal is circulating in the European Parliament to "unbundle" Internet search engines such as Google's from "other commercial services" that they offer. This proposal effectively calls for a break-up of the company.

Google currently owns 90% of the European search market and has been under antitrust scrutiny in the region since 2010. This makes liberal European politicians very nervous.

Google will remain the dominant Internet search engine for years to come due to its deeply embedded position in the market.

But it faces two different types of challenges.

The Interwoven Challenges Google Is Facing Down

First, the same challenge facing Apple as well as Alibaba Group Holding Ltd. (NYSE: BABA) is the law of large numbers. It's going to be difficult for Google to keep growing such a large business at a 15% to 20% rate without entering new markets or introducing new products.

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As unimaginable as it seems today, the Internet will not keep growing in a straight line to infinity. Microsoft's BING search engine has made some inroads into the company's dominant search position in the U.S., and Yahoo! Inc. (Nasdaq: YHOO) is another active competitor, but neither poses a near-term threat to its dominant position.

The second challenge is political. Google needs to be careful not to get on the wrong side of governments around the world who are suspicious of powerful companies.

With its stated overwhelmingly dominant share of the European search market, the company effectively has a monopoly. In the U.S. its share of the search market is much lower but was a still-dominant 67% in October.

The company must be sure not to take overt steps in Europe to suppress competition, or it will attract the types of attention from regulators that are now threatening it. One has to wonder what the reaction, if any, of the U.S. authorities will be to any attempt by the European Commission to break up one of America's great business success stories.

Such an attempt could trigger serious economic tensions at a time when the two regions should be working on common problems such as sluggish economic growth and the threat from Russia to the Ukraine and Eastern Europe.

Google's dominant role on the Internet does not appear to be in any immediate danger. But success attracts unwelcome attention from competitors and governments. Of which Google is receiving plenty.

About the Author

Prominent money manager. Has built  top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.

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