This Just In: Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Google me this
Will Google (NAS: GOOG) wow Wall Street when it reports earnings this evening? I honestly don't know. But I do know someone who (thinks he) does: investment banker Wells Fargo.

You see, Wells jumped the gun a bit yesterday. After watching Google basically tread water for all of last year, with the stock ending the year just $3 higher than it went into it, Wells worries that Google won't fare so well in the new year. Arguing that discretion is the better part of value, the analyst therefore pulled its buy rating on Google ahead of earnings. It downgraded the Internet search stock to "market perform" on a series of concerns, such as:

  • "integration of Motorola Mobility (NYS: MMI) ," compounded by "inevitable margin decline due to Motorola Mobility."
  • "tougher comparables"
  • "potential for increased regulatory scrutiny"
  • "increase in operating expense to support adjacent growth initiatives as it battles Amazon.com (NAS: AMZN) , Apple (NAS: AAPL) , Microsoft (NAS: MSFT) & Facebook"

Is Wells right to be worried? Let's take these one at a time.

Mo-mo a go-go?
When Google announced it was buying Motorola Mobility, investors cheered. Finally, the maker of Android operating systems would own its own war chest of patents. Finally, it could do battle with litigation-happy Apple, facilitate the development of Android-enabled smartphones, and defend its multiple hardware partners from Apple's lawyers. There was just one problem...

Google itself became an Android manufacturer. Buying Mo-Mo, one of the biggest names in handsets, put Google in the uncomfortable position of competing with erstwhile allies like Samsung and HTC. Whereas pre-merger, Google was these companies' benefactor, providing them with royalty-free operating systems for their cellphones, now Google has become a rival.

Patents... or profit margins?
Figuring out a way to make money off Motorola, while at the same time mollifying its collaborators, is going to be tricky business. I'm honestly not sure Google can pull it off. Meanwhile, what I am sure of is that when you take one company with a 33% operating margin, and marry it to a second company with a 0.5% operating margin, the average of these two numbers is going to be a whole lot less than 33%. "Tougher comparables," indeed.

Big Brother is watching you
As far as Wells' concern over heightened regulatory scrutiny goes, I've got good news and bad news. Good news: I don't think global governments are going to pay more attention to Google this year than they did in years past. Bad news: I don't see how they could pay more attention to Google than they already do. From the Justice Department's AdWords prosecution, to the European Commission's antimonopoly investigation, to privately initiated, ITC-adjudicated patent infringement cases, Google is clearly under the microscope already.

Mo-mo a gone-gone
And these aren't even my biggest concerns. Once upon a time, Google did one thing (Internet search) and did it really, really well. The company name became a verb, and anyone wanting to know about anything had only to "Google" it to find out what they wanted. Today, that's all changed. Microsoft's Bing has proven a viable contender in search, while Google seems increasingly distracted by also-ran activities. Smartphone hardware, where Apple's now the incumbent. Television, where Comcast dominates, TiVo litigates, and Netflix and Amazon are the real disruptors. For heaven's sake, I hear Google's even been investing in windmills!

Used to be, we all knew what Google "was going to be when it grew up" -- because it already had grown up, in record time, to dominate the search industry. Now Google's trying to grow again, and my big worry is that it's diworsifying into ever more competitive, and less profitable, industries.

Foolish takeaway
Long story short, I don't know what kind of numbers Google will report this evening. (And newsflash: Wells Fargo doesn't, either.) That's not what worries me, though. What worries me is what happens to Google in the months and years to come. It should worry you, too.

That's not to say, though, that you can't get rich from investing in other companies that will benefit from Google's ever-expanding business activities. Read our new report on "3 Hidden Winners of the iPhone, iPad, and Android Revolution." It's free to download today --butclick quicklybefore it disappears forever.

At the time this article was published Fool contributor Rich Smith does not own shares of any company named above. In particular, he no longer owns shares of Google. (And now you know why.) You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 348 out of more than 180,000 members. The Motley Fool has a disclosure policy.The Motley Fool owns shares of Wells Fargo, Microsoft, Amazon.com, Google, and Apple, and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Netflix, Apple, Google, Amazon.com, and Microsoft, as well as creating bull call spread positions in Apple and Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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