Hot Stocks for a Cool Market: Google

Summer's heating up, but apparently the stock market didn't get that memo. Still, there are plenty of places for burned investors to find respite. In this series, we highlight companies with the potential to warm up your portfolio's returns.

Google (GOOG) is hot -- even if its stock is cold. In fact, it's so hot that the Federal Trade Commission has begun reviewing Google's business, presumably to see whether this digital titan played dirty on its path to Internet Olympus. (I can just picture the bumper sticker now: "America: Where Success Begets Scrutiny.")

That target on Google's back is no surprise: That's what happens when you snag 83% of global search engine market share and then leverage that success into new business lines like social networking, display ads, browsers, and even operating systems.

But while some investors are spooked by Google's eager rivals and the glaring spotlight in Google's way, they're missing the forest for the trees. Most investors don't get Google -- odd considering that its sites notch more than 1 billion unique visitors each month. Google's hassles are a cost of doing business when you're a global market dominator. Here's why I think the company will continue to dominate for years to come.

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Getting Google

As a former Google hater, I know the basic bear case against the company: Competition is fierce, the risk of disruption is ever-present, and the company gets 96% of revenue from advertising.

As a doubter, I underestimated the stickiness of Google's brand and its ability to stay ahead of the innovation curve thanks to unparalleled intellectual and digital horsepower.

Search is a natural monopoly where your edges compound. Each new search that funnels through Google's algorithms makes them incrementally smarter, able to deliver even better, more relevant results to users. And because Google fields vastly more searches than its relatively puny rivals, its edges should continue to sharpen.

Uninformed investors hear that Google gets 96% of its revenue from ads and just assume the business is a one-trick pony. Far from it. Google has lots of tricks. What those investors are missing is that Google has diversified its channels for delivering ads. Users are encountering increasingly diverse ads (keyword, display, video, click-to-call, etc.) across increasingly diverse channels (, Chrome, Android, YouTube, etc.).

Google recognized a long time ago that competition was only a click away at So instead of merely relying on its superior search offering to keep the hits coming, it started moving upstream in the user experience to make Google search stickier. Google's Web browser, Chrome, has captured 20% market share and climbing. And its mobile operating system, Android, has skyrocketed to a leading 38% share of U.S. smartphones. With Google now activating more than 500,000 Android devices daily and growing, it's little wonder that its mobile search traffic is up 500% over the past two years.

And then there's the dollars and cents. Google's $31.6 billion in net cash -- a fat 18% of the company's market value -- gives the stock some downside protection and Google the wherewithal to withstand even the worst of crises. Not that the recession halted Google's growth -- sales are up a compounded annual rate of 20% over the past three years.

You wouldn't know it from the stock price, though. Google's shares are off 17% from their 52-week high despite the continued strength of the underlying business and the major momentum behind display ads, YouTube, Chrome, and mobile search. I peg the shares as a buy below $550.

Not All Hunky-Dory
Google certainly has challenges. Microsoft (MSFT) is pushing a full-court press with Bing, even if a futile one, and Facebook looms as a rival for ad dollars and mindshare. Then there's Apple (AAPL), which is fighting Google tooth and nail for dominance over smartphones and tablets.

And, of course, the government, which is giving Google a close inspection. My read is that excitable regulators will walk away empty-handed, but I expect Google will face intense scrutiny from regulators the world over for, well, pretty much forever. Particularly in China, which Google has essentially conceded to rival Baidu (BIDU) for the time being.

The Bottom Line
Google has a dominant search franchise whose advantages are growing by the minute. Throw in a host of call options -- Android, Chrome OS, Google+, Google TV, and more -- and you're looking at even more compelling upside for a great business already selling for a down-and-out price.

Senior Motley Fool analyst Joe Magyer owns shares of Google. The Motley Fool owns shares of Apple, Microsoft, and Google.
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