Google vs. Microhoo

The war for the internet started long ago, but it escalated dramatically this week. Much has happened over the last few days, but I'll start with a Google update. After an earnings release that disappointed analysts Google's stock tumbled after the close yesterday. For the first time since Google went public its stock price dipped below its 200 day moving average. The introduction has gone fairly well. I don't expect them to develop any sort of extended relationship. In fact, I think that this represents an extraordinary buying opportunity for Google shares. I won't discuss my entire Google thesis here, but suffice it to say that the growing reach of the internet is one of the most profound trends in the world marketplace and Google is in the best position to monetize:


The surprising thing about the glut of news this week is that the best news for Google issn't the news about the successful bid to open up the C Block of wireless spectrum nor is it the recent ComScore numbers confirming Google's continued dominance in search, rather, it is the news that Microsoft announced an unsolicited $44.6 billion bid for Yahoo.

Microsoft is clearly running scared. Its recent moves confirm this fact. Buying aQuantive for $6 billion, buying a 1.6% stake in Facebook for $240 million and now announcing an unsolicited offer for Yahoo! at $44.6 billion can only mean one thing: Microsoft is waging an all-out war against Google's internet dominance and is willing to pay a pretty penny to maintain its internet relevance. You can see it through their overspending for internet properties. You can see it with their "Startup Center" advertising campaign. You can feel it with their focus on online advertising companies. They are throwing their best people at the internet because their software business affords them the pleasure, but it many ways it is like HP's Ink business: its great while it lasts, but the writing is on the wall.

I personally am not a big fan of Yahoo! Sure, they were an internet pioneer but they seem to have lost touch with internet reality. Again, I don't have time now to go into my full Yahoo! thesis, but I think a quick anecdote will tell it all. When Google develops a new application they tell their engineers to solve client's problems. Once they have solved the problem, developed a strong user base and proven the concept, they then hand off the application to a monetization team that seeks to find ways to monetize the application. When Yahoo! designs applications engineers work together with monetization teams, oftentimes crippling projects while they are being developed.

The solution? Go long Google at its smooth 200dma. Meanwhile watch as Microsoft enters an incredibly difficult integration and loses focus on its core suite of products. I view the Yahoo! purchase as a necessary evil for Microsoft: they can't afford to let anyone else buy Yahoo!, but at the same time they can't relish the challenge of integrating Yahoo! while in a war with Google. Ordinarily I would expect other offers for Yahoo, but this deal is just too rich as it is and I don't think IAC or anyone else will do more than a bit of due diligence before passing.

Update: Fed Cuts Rates to 3.5%

Well, apparently Ben Bernanke is an avid reader of this blog because he read my post last night calling for an emergency rate cut and promptly cut rates 75 bps before the open of the market this morning. The move was welcomed by the street and the market reacted positively, rebounding from a miserable open that saw the Nasdaq down almost 5%.

When I step back and look at all this fear about a recession I can't help but smile. Whether or not we really end up having two consecutive quarters of negative GDP growth doesn't really matter. The point is that we had excesses during the up-cycle and a healthy down-cycle to remove those excesses is necessary and useful. With the Fed Funds rates at 3.5% a fiscal stimulus package on the way and an ongoing "pricing in" of the impending recession, one could make a reasonable argument that the second half of 2008 might not be as bad as we had originally thought. The best news for the market this year would be signs that the housing market is stabilizing. If we don't get that we are still not bullish.

*For growth oriented investors there was a sale on Google shares at the open this morning. After trading above $700 three times in 2007 and briefly touching $747 a share Google hit a low today around $561. This is the first time we have seen Google dip below its 200 day exponential moving average in 10 months. For long term buyers of Google today was a great accumulation day. Again, we are not saying that Google's shares won't trade lower. We actually wouldn't be surprised to see them dip back into the $400's as advertising budgets are slashed, but the fundamentals of Google's story are still strong.

Not Quite a Correction

A market correction is defined as a 10% drop. We haven't had a correction in any of the major indices for quite some time, but we are close right now.


At a decline of 8.31% we are 1 or 2 down days away from a correction. As a point of reference, a 20% decline is a bear market. Naturally along with the correction comes enhanced volatility. I've got a running bet with 3 to 1 odds that we'll hit 35 before the year is out. What do you think?


I think I told someone the other day that as sick as it sounds, buying Google now, even at $700 would probably look smart in 5 years. I won't back down from that statement, but I will say that buying Google on the dips is probably the best way to scoop up shares. If you look at the graph below I think you can make a strong argument that buying Google when it is within 5% of its 200 day exponential moving average is a safe bet. Even after the after market action today that left google at 627 the shares are still 16.5% above their 200 day EMA. In other words, you may want to wait another 50-60 points or so before you dive in.

Google Telephony

Okay, so today's news about Google's entrance into the telecommunications world has been rumored for months if not years. But, today's announcement was still real news and represented what for many was a significant departure from the announcement they were expecting. Many thought Google would announce a GPhone, not unlike what you see to the right. What they got was an alliance of 33 companies attempting to rewrite the rules of the cell phone world. I won't get you my first impression here. Rather, I will shower you with links. It is a cop out, but I really can't do this story justice. If you read this in order it is better:

1) Andy Rubin: The Man Behind the Google Phone

The Google Phone — which, according to several reports, will be made by Google partners and will be available by the middle of 2008 — is likely to provide a stark contrast to the approaches of both Apple and Microsoft to the growing market for smartphones. Google, according to several people with direct knowledge of its efforts, will give away its software to hand-set makers and then use the Google Phone’s openness as an invitation for software developers and content distributors to design applications for it.

If the effort succeeds, it will be the most drastic challenge to date of the assertion by Microsoft — the godfather of the desktop PC — that Google and other members of the so-called open-source world can imitate but not innovate.

2) Google Phone Crunched

Reports started trickling out last week that Google is ready to announce its Gphone, or rather Gphones. It is more a reference design, than a single phone. Android-based phones will start to come out on the market in the latter half of 2008 (from HTC at minimum). One mobile startup CEO I know says he was contacted on Friday by Google and given the final go-ahead to port his app onto Android, which his company has not even started to work on yet. The software development kit will be available on November 12. Today’s announcement is just that. There is nothing concrete here in terms of products or services, but going mobile represents a major growth opportunity for Google, which wants to bring the Internet (along with search and contextual ads) to your phone.

3) Bloomberged

Spending on mobile-phone ads may jump to $11.4 billion worldwide by 2011 from $2.17 billion today, according to Informa Plc, a London-based research firm. Google, in Mountain View, California, gets 99 percent of its more than $10 billion in annual sales from advertising, mostly by selling text links next to search results on its own pages and partner sites.

Google shares passed $700 last week, gaining $100 in less than a month, on speculation the company would extend its lead in Internet advertising into wireless devices. Gene Munster, an analyst at Minneapolis-based Piper Jaffray & Co., predicted as early as August that Google was developing software to run mobile phones.

4) WSJ

Android is a bid to change how the wireless industry operates. Carriers traditionally have decided what applications most consumers see on their cellphones, setting rules and negotiating fees for software developers to gain access. Google has struggled at times in recent years to get its products -- including Google Maps, Gmail email and its search engine -- onto mobile phones in a way that's easy for people to use. With Android, software makers can theoretically write applications that run on any user's phone -- and consumers can freely browse the Web.

Google Misses Earnings, Drops 7.5% After Hours

After missing earnings today after the bell Google is trading down almost 8% in after hours trading. Google could trade tomorrow back in the 400's . . . . territory it hasn't visited since the end of May. This is only the second time Google has missed earnings and obviously the market was not impressed with Google's 28% profit growth. The 7.5% drop washed away roughly $13 billion of market value.