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Wednesday, June 29th, 2011
network effects

I find myself thinking quite a bit about Google (GOOG) these days, so we’ll revisit it less than four months after I noted that it had been a market stock for several years.  Since then (the period shown above), it’s been anything but, lagging a flattish S&P badly, even given the bounce the last couple of days.

One big factor was the weak guidance in April and you can see the drop in estimates associated with it, although percentage-wise it wasn’t much and estimates farther out snapped back to almost the same level that they were.

There’s a lot going on with the company and this isn’t the forum to comment on each item of importance.  The central question is the nature and sustainability of its dominant position.  (Charlie Munger, for example, is quoted as saying that it’s as substantial as he’s ever seen.)  The talk is all about “network effects” and how they lead to competitive advantage.  But, we’ve seen other seemingly unassailable positions frittered away, Research in Motion being but one recent example.

I’m as addicted to what Google provides as the next guy, and my puzzling over the company relates to my belief that its core product is not what it was.  My working theory is that somewhat messier search results lead to better ad revenue and that Google is optimizing its take, not my experience.  Therefore, I’m an addict on the lookout for a different dealer.

I also think that the company could be doing much better in some of its vertical markets.  Take investments — Google Finance should be a powerful player, but the firm has done nothing interesting in the area.  (Full disclosure:  Awhile back, I sent a note to the firm that I could help them take it to the next level.  I never heard back.)

Speaking of network effects of a different kind, the average analyst rating on the stock remains locked at the very high level shown in the March chart.  That seems likely to be the case until something dramatic happens.

Is Google a buy or a sell?  I don’t know (and don’t have a position).  But the longer your time horizon, the more you’ll need to think about whether the network effects are more powerful than the way they are being valued today or weaker than most of us believe.  (Chart:  Bloomberg terminal.)

double counting

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