Google Might Be Overvalued As Failures Build

Image via Flickr/ Bohan_伯韩 Shen_沈

The question isn’t how to kill a giant — it’s how to know when the behemoth is dying. That’s the skill needed to win big in the stock market, and it’s a skill only a select few manage to cultivate. Google (NASDAQ: GOOG) is one of the biggest behemoths of them all, so figuring out when it’s in decline is a big deal. On the back of failure after failure, it’s time to take a long, hard look at the firm’s foundations.

Google has had a bad run in the last year after an almost spotless growth record since going public. The company’s stock has dropped 9 percent of its value in the last 12 months, and, considering the way it’s valued right now, it seems like it could lose a whole lot more in the quarters ahead. The company’s earnings are set for release on Thursday, Jan. 29. Heading into that date, it’s time to take a look at how Google is valued and why things have gotten so bad for investors.

Failure Haunts Google

There have been several real failures that should cause investors to question the Google growth formula. Whether or not the company can rectify them and undo the harm they’ve done will mark Google’s management as either successes or failures. Here’s a rundown of the big mistakes that have occurred in the past year or two.

Expenses are becoming a problem at the company as it invests heavily in projects like Google Glass, Project Ara and Google Fiber that are unlikely to reap any sort of return for the company in the medium term. Long-term benefits are all very well and good, and management is sure to claim huge achievements as the result of their foresight, but it’s not good practice to draw those lines in a portfolio.

Advertising revenue, particularly that from search, dominates the Google accounts. Unfortunately, the company has not been able to pick up the pace on mobile, while paid clicks on Desktop have been a huge disappointment, slowing more quickly than expected.

Google Glass is a goner. All of the time, money and news coverage that went into Google Glass appears to have been for naught. The company will never likely never reap a penny from the project and developers aren’t pleased with its apparent abandonment.

Motorola had to be sold off after years of nothing, a serious strategic error that will haunt top Google management for quite a while.

Google Plus is deader than Glass. Nobody really cares about the network, and the massive departure from Facebook just isn’t going to happen.

Innovation is missing at Google and its attempts are alienating previous fans of the company. Glass alienated developers, Enhanced Campaigns angered advertisers and Android Lollipop failed to please anybody.

Why So Serious?

Google is a high-valuation company, and failures like these have mounted up. Investors are questioning the company’s management, and with a P/E of 27, they should do so persistently and aggressively. From a range of perspectives, Google is overvalued, and next week’s earnings will test the mettle of the firm’s investors.

What does a P/E ratio of 27 represent, anyway? It’s a number that approximates the growth expected from Google in the coming years. This is a complex equation that often has nothing to do with fundamentals, but some comparisons may make that particular figure more starkly defined. Apple trades at a P/E of 17, Microsoft trades at a P/E of 18, Yahoo trades at 6, and Samsung Electronics trades at 8.

Why does Google deserve that premium number? The answer, at least according to traders over the last year, is that it doesn’t. The company’s share price is no longer being inflated, while its earnings continue to grow much more slowly than anticipated. That will deflate the company’s P/E over time should the trend continue.

A stream of failures is not a good sign from an innovation lead company. Google’s ad business appears to be maturing, and it’s got no other growth sectors to pick up the slack. None of its major side businesses are ever likely to yield returns and investors are getting used to the score.

Google’s not going to disappear, but it will slow down. Next Thursday’s earnings report is a good place to start looking for signs of cracks in that colorful facade.

Disclosure: Author represents that he has no position in any stocks mentioned in this article at the time this article was submitted.