Why Google Just Jumped to the Top of My Investor Radar Screen
Companies / Google Jul 17, 2011 - 05:18 AMBy: DailyWealth
Dan Ferris writes: When the CEO of a company you own shares in is called before Congress to testify, you should be worried about a disaster... right?
Not me... especially if that company is a World Dominator.
For the past five years or so, my readers have been making steady, safe returns in the world's highest-quality companies... companies that gush free cash flow, sport huge profit margins, grow steadily, and generally dominate their industries.
Some of these companies own such a huge market share, the government regularly reviews them for "unfair" business practices. And while most mainstream investors get worried when something like this happens to a stock, I actually love to see it in a stock I own... or am interested in buying. That's why I'm getting interested in Google.
If you had any doubts about whether Google is a truly great business, we got a big hint this month. The company is bowing from pressure by U.S. lawmakers, and has agreed to send company chairman Eric Schmidt to testify before an anti-trust subcommittee. The Federal Trade Commission has begun a formal investigation into Google's business practices.
What does it all mean? It means Google is such a fantastic, market-dominating business, it has attracted the government's attention. According to the San Francisco Chronicle, two senators sent a "strongly worded letter" to Google, demanding it send one of its high-ranking officers to testify.
These practices – of constant innovation, buying smaller businesses that can serve Google's customers and shareholders, and being a general S.O.B. to compete against – have created one of the world's most valuable brands... and an incredible business. Google's gross margin is consistently in excess of 60%, and its after-tax profit margin is an enormous 29%.
But the government inquiry is all for show, as far as I'm concerned.
And I ask you... have dominating firms like Intel, Google, or Microsoft in any way lowered our standard of living by engaging in allegedly "anti-competitive" practices? Has Microsoft prevented you from using a different operating system? Has Intel prevented you from using a computer with an AMD chip in it? Has Google forbidden you from using Yahoo?
If any of these companies disappeared overnight, more people would be unhappy than relieved about the lack of "anti-competitive" practices in the market.
Microsoft has few competitors because it's really, really hard to create a huge, robust new PC operating system. Intel owns 80% of the global semiconductor market because it's really hard to keep innovating and creating brand new more powerful chips every couple years. And Google is the No. 1 search engine because it revolutionized the way Internet searches are done.
That Google has attracted anti-trust attention hasn't scared me away at all. It has brought the company front and center on my radar screen. It looks like we might have a new World Dominator in Google... if we can buy it at the right price.
In sum, when a company is so dominant and profitable that it draws government scrutiny – like Intel, Microsoft, and Google have all done in the past few years – it's not time to run away. It's time to seriously consider buying it.
If you buy it at the right price, you're much more likely to collect safe, ever-growing dividend payments – or make capital gains – than you would buying a middling business the government leaves alone.
Good investing,
Dan Ferris
The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.
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