3 Reasons Why Google Shouldn't Be Hitting New Highs

Google (NAS: GOOG) seems to be on top of the world.

The world's leading search engine is growing at a heady clip, overcoming the global economic slowdown without breaking a sweat. Its Android platform -- though not a hotbed of monetization given its open-source nature -- is the top dog in the booming mobile arena.

Perhaps more important, Google hit a new all-time high last week, surpassing its previous peak set nearly five years ago.

Investors are giddy about Big G, but what if the optimism isn't entirely warranted? I'm no Google hater. The company rocks, and it's been a big winner for our Rule Breakers newsletter service over the years. I'm just concerned that some of the recent gains may not be entirely warranted given the coming challenges facing the dot-com darling.

Challenges? Let's spell them out.

1. Mark Zuckerberg is coming
A rare rally in the shares of Facebook (NAS: FB) broke out last month after CEO Mark Zuckerberg revealed that the leading social networking website has a team working on search.

Why not? Facebook's attracting 955 million active users that are performing roughly a billion search queries daily within the website. Why outsource the solution when it's so lucrative?

The bigger concern for Google here isn't that there's yet another pretender trying to eat into its bread-and-butter business, or even that it's coming from a website that consumes so much time within the Internet experience. The real worry here is that Facebook will take search to a new level that Google can't reach.

Facebook's plans involve diving deep into a user's many friend connections to make search better. Searching for a nearby place to eat can reference friends that have eaten there before. A search for a historic event can remind you of a third cousin that happens to teach world history or a distant sorority sister that happens to live near the battlefield that you're researching.

Don't underestimate Facebook's threat.

2. Fear the Qihoo Moment
Baidu (NAS: BIDU) was on top of the world this summer, commanding 80% of the share of the booming Chinese Internet search market. However, something sparked in Qihoo 360 (NYS: QIHU) , a small online company best known in China for its Web browser and anti-virus solutions. Qihoo 360 booted Google -- yes, Google -- as its default search engine on its browser. It replaced it with a homegrown solution.

Did Google take a hit on this? No. It has gone on to new all-time highs last week, obviously. Billions have been shaved off of Baidu's market cap, though, on reports that Qihoo 360's market share is now 5% to 10% of the Chinese market. Baidu's still the undisputed top dog, and while Qihoo 360 may have eaten at Baidu's popularity in the near term, we're still looking at a company accounting for 75% to 80% of the searches in the world's largest Internet market.

Maybe this isn't any different than when Microsoft (NAS: MSFT) turned heads with Bing a couple of years ago. Google bounced back, and Baidu will, too. However, if Baidu -- a company that commands a larger share of the Chinese market than Google's stake in stateside searches -- can become temporarily susceptible to an upstart, why should Google be any more resilient?

Oh, and don't go thinking that this happened to Baidu because of its high valuation. Google and Baidu are closer than you think. Baidu trades for 18 times next year's projected profitability, while Google is fetching 15 times next year's bottom-line forecast -- and that's even though Baidu is expected to grow its earnings more than twice as fast as Google in 2013.

3. Android may not be on top forever
Google's Android may have commanded roughly two-thirds of the smartphone market during the second quarter, but it's not something that may stick for long. The new iPhone 5s are selling briskly. Microsoft is rolling out the new Windows Phone 8 later this month. Even BlackBerry actually gained net subscribers this past quarter.

Forget about Google's inability to cash in on Android's success as well as Apple has with iOS. Even what Big G has today may not be here tomorrow.

So, are you still sure that these new highs are warranted?

Thinking outside of the search box
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The article 3 Reasons Why Google Shouldn't Be Hitting New Highs originally appeared on Fool.com.

Rick Aristotle Munarriz has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu, Facebook, Google, and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Baidu, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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