I thought I’d end this year the way everyone else is: by writing about Google (GOOG). Just Google “the year of Google” and you’ll get some sense of the hype around this stock. Of course, if you’ve ever watched Jim Cramer’s “Mad Money”, you’ve already had a heaping spoonful of said hype.
So, why is a value investing blog even mentioning a stock that’s not far from having a triple digit P/E ratio?
I count seeking businesses with a competitive advantage among the tenets of good value investing. Google has a competitive advantage. In fact, one might even say its franchise is web search. I wouldn’t say that. I mean, Google does have a franchise; but, it doesn’t have a monopoly on web search and never will. There are real problems with Google’s model that are often overlooked. It does a poor job of finding certain sites that are difficult to describe in keywords. For this reason, there may still be a market for web search in the form of specialized niche directories and in some of these “social search engines” (e.g., Stumble Upon) for many years to come.
I’m not suggesting any of these services will be as successful as Google; I’m sure they won’t be. I am simply pointing out that there is a difference between a need and the means by which that need is satisfied. Even as the dominant search player, Google will only have a franchise on the means (keyword search); it will not have a franchise on the need (finding stuff on the web). Also, Google can not, at present, rightly be called the dominant search player. There is no dominant player in search. Google is the leading search player. It is also the catalyst for many changes in search. But, it is not yet the dominant player in search the way McCormick (MKC) is the dominant U.S. spice producer.
Looking at McCormick’s franchise is actually a pretty good way of evaluating Google’s. Why do I say McCormick is the dominant player (domestically) in spice, but Google is not yet the dominant player in search?
McCormick has a 45% share of the U.S. retail spice market. Its closest competitor has a 12% market share. We may differ about exactly how the web search pie is carved up. But, I think we can agree that Google’s share of the search market is no greater than 45%, and that at least two of its competitors have a share of the market greater than 12%. So, Google’s position differs from McCormick’s in that the domestic search market is less fragmented than the domestic spice market.
The spice market is an upside down funnel. The few producers are at the top. They feed their products through three distribution paths: retail, industry, and restaurants. In each case, the shape of the upside down funnel remains intact, because the widening happens at the very end. The ultimate consumer of McCormick’s product doesn’t get to choose …Read more