Why Google (NASDAQ: GOOG) is Underperforming the Broader Market

Ask just about anyone alive today, and they’ll tell you Google Inc. is one of the most prominent innovators out there.

Driverless cars, humanoid robots, fiber-optic Internet… the list of futuristic tech goes on for quite a while.

For those of us who find technology fascinating and often catch ourselves thinking about the future and what it holds (futurists, as some would call us), Google is perhaps the single most exciting company in the world.

Yet from a commercial standpoint, Google has ironically offered very little disruption in recent years. Sure, Google X may have a collection of mind-blowing gadgets in the pipeline, but will any of them ever actually turn a profit? After all, none of these side projects have been able generate income so far…

Just a few years ago, the market had particularly high hopes for Google. Growth was expanding, cash was piling up, and the company was looking to step out of the online advertising business into the world of consumer electronics and hardware…

Today, however, the once-gleaming future of Google seems much less certain. Growth in ad revenue has finally begun to decline, confidence in the commercial viability of Google Glass has disappeared, and the company is sitting on a collection of tentative R&D projects and fruitless acquisitions.

The End of an Era?

Back in October of last year, I called a top on Google and explained three reasons not to buy shares of the company.

So far, the article seems to have been well timed, as evidenced by the fact Google is now facing its longest and most dramatic downtrend since the financial crisis of 2008.

Below is the three-year chart for Google, showing a series of lower highs and lower lows beginning in early to mid-2014. After years of bullish sentiment, it seems increasingly clear that the market has begun to catch on to the questionable nature of the company’s future:

Now, I’m not going to go into detail about the article here (check the link above if you want to read it), but I will point out that the number one reason I gave at the time for not buying Google was general confusion, and this still holds true today.

In other words, Google seems to have an identity problem, which makes it incredibly difficult to value…

As Warren Buffett once keenly stated in regards to Google, “I just don’t know how to value them.” Admittedly, Warren would probably say this about most technology companies out there, but there’s a reason he singled out Google in particular…

As exciting as it may be to consider all the possibilities (personal robots, augmented reality, autonomous homes, etc.), the simple truth is that Google still has yet to prove capable of rolling out any of these technologies on a commercial scale. 

Lots of Cash… Little Execution

It’s worth pointing out that Google hasn’t actually accomplished many of the technological feats it has recently slapped its name on.

The most impressive piece of technology on the company’s driverless cars, for instance, is built by private company Velodyne. Its automated smart-home products were simply scooped up in an acquisition of Nest. And its humanoid robots are the brainchildren of DARPA and Boston Dynamics.

The reality is (as strange as this is to say) Google’s has a problem of too much cash on hand. Specifically, Google seems to have no idea what to do with all the money it’s obtained through its high-margin advertising business, and it is hurting its investors as a result…

The market’s inability to put an accurate dollar value on Google is reflective of this mud-on-the-wall approach. Throw enough and something will stick, but is that really the way you want your business to function?

I’ve pointed out in the past that Google, despite its current dominance in the online ad space, is actually quite susceptible to disruption. My guess is that Google execs know this fact all too well, which is why they’re grasping at straws from wearable computing to the connected home all the way to (believe it or not) immortality.

Of course, this isn’t to say Google’s R&D efforts are meaningless, but it is to suggest the company needs some basic direction in terms of spending and execution. Enough of these pie-in-the-sky ambitions — let’s see something practical for once…

As far as I’m concerned, if you’re a technology company sitting on $62 billion in cash, you need to do something with it other than simply throwing it in government notes and municipal bonds that are drastically underperforming your respective industry.

(A pointless but adorable representation of the Google Bear Trend)

At this point, I’m convinced there are only two ways Google can truly reinstill confidence in its investor pool:

The first option is to stop toying around (pun intended) and dipping its toes in the water over and over again. Google has a long history of noncommittal projects and half-assing what could be breakthrough ideas.

Quite simply, the company needs to take a risk and leverage its cash pile to actually roll out a physical product for once.

The second option is both obvious and simple: Google needs to start dishing out earnings to investors. $62 billion in cash and you don’t offer a dividend? Seems like a bit of an insult to anyone who’s been holding shares.

In 2013, Google CFO Patrick Pichette claimed, “We don’t have religion about cash and hoarding cash. Google doesn’t have this view that it will keep all its cash for eternity.”

Fast-forward to today, though, and Google has increased its cash position over 29% since Pichette’s statement. At face value, that might sound like a good thing, but not when you already had $48 billion in the first place, significant growth reduction, and a mob of investors itching for a dividend payout.

Unfortunately, it seems Pichette will never make good on his promise. A recent 8-K filing revealed the CFO will be leaving the company (rarely a good sign) as soon as the company finds a replacement.

For now, investors can only hope Pichette’s replacement will be more dividend-friendly. Until then — or until the company actually executes a viable product — there’s little upside left in what was once one of the greatest tech plays of all time.

Until next time,

Jason Stutman

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