Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
Last week, I pulled my copy of The Gorilla Game off my bookshelf. This book by Geoffrey Moore, Paul Johnson and Tom Kippola was key in helping me form my investing strategy of buying leaders in important, emerging industries. As I was poring over this 1998 masterpiece I meant to consider how the "game" has changed in 17 years, but I wound up using the opportunity to look at my portfolio and ask myself, "Is this company really still a leader?"
I hold Google stock in my Strategy Lab portfolio and personal portfolio. But I realized, last week, that I don't make much use of Google's primary service any more. Is the company that was once in hyper growth and dominant in the land of search engines now boring, unimportant and in the process of being disrupted by newcomers such as Facebook?
When Google first came onto the scene its service was search and its product was paid advertising placements. Nobody had yet coined the term "social media" and there was no Facebook. Online advertising was small but fast growing and Google was dominant. Mr. Moore probably would have written Google up as an industry gorilla if his book had been published a few years later.
Much has now changed. I visit Google less often for search. I often dictate my questions to Siri on my iPhone instead. Or if I need information on something current I'll search Twitter. Even more often I'll find myself clicking on interesting stories brought to me by Facebook's algorithm, which controls whatever I see in my personal newsfeed.
This led me to wonder … is Google still a gorilla (i.e. market leader)? Or is it being disrupted by new players, never to regain its former status?
Here's how I answered my own question: Google may have to compete for eyeballs against social media, but its core product is still dishing out online ads and it is still the clear leader in the market with best-in-class technology and tools for advertisers. In many ways Facebook has caught up, but it certainly hasn't redefined the game. I say this because, according to the rules of the Gorilla Game, current technology leaders are typically disrupted only when a new player comes to market with innovative new technology. Everyone competing with Google in the ad space is doing so with similar tools. They look up to Google as the gold standard.
While I might find myself using Google Search less frequently, I'm not going to invest purely based on my behaviour. I'll look at what the average Internet user is doing. Google is still all over the place and growing. It owns the No. 1 video platform in the world, YouTube, which is effectively monetized by ads. It owns Android, the biggest mobile operating system in the world as measured by users. App developers make use of Google's ad platform when they want to monetize their free apps. When a mobile device user asks Google's voice-activated assistant to identify nearby Italian restaurants, the pleasant female voice introduces options that make rich use of paid placements.
Importantly, Google is still growing nicely. The hyper growth is over, but analysts expect earnings per share to expand another 16 per cent in 2016. The stock trades at 16 times next year's earnings. It's quite rare to be able to own a growing industry leader in the technology market for such a reasonable P/E ratio.
Can Google get disrupted? Of course it can, and it absolutely might happen some time in the next decade. I'll be watching closely and if Google's dominance is truly challenged by new technology I'll exit the stock. But until then I'm sticking with my buy-and-hold strategy.
Chris Umiastowski