The Investment Scientist

Standard & Poor’s Downgrade Spree Hits Google

Posted on: August 17, 2011

Not satisfied with its downgrading of U.S. Treasury Debt and Fannie Mae, today S&P downgraded Google’s stock from “Buy” to “Sell,” sending GOOG tumbling by 3.3%.

In case you don’t remember, yesterday Google announced that it would purchase Motorola Mobility for a whopping $12.5 billion in cash – a decision that prompted S&P’s  downgrade of Google. According to S&P’s equity analyst, Scott Kessler:

After further consideration of GOOG’s plans announced yesterday to purchase Motorola Mobility (MMI 38, Hold), we see greater risk to the company and stock. We expect the transaction to be consummated next year, but later than early ’12, which GOOG indicated. Moreover, despite MMI’s extensive and valuable patent portfolio, we are not sure it will protect Android from IP issues. We also believe the purchase of MMI would negatively impact GOOG’s growth, margins and balance sheet. Based on revised DCF analysis, we are cutting our 12-month target price to $500 from $700.

Apparently S&P’s analyst believes that he is smarter than Larry Page, Google’s Founder/CEO.  Allow me to offer four points in defense of Larry Page’s bold decision to purchase Motorola Mobility:

  1. The use of Google’s Android OS is growing exponentially. Late last year, for example, it surpassed Apple’s iOS to become the world’s most popular smart phone operating system. In Q2 of 2011, it captured 44% of the market share, compared to Apple’s 26% and Microsoft’s 6%.
  2. Everyday, half a million Android phones are activated. To do this, one must sign up for a Google account, which for all practical purposes will be a Google+ account. With Android in its arsenal, Google has one more leg up in its competition with Facebook to dominate the lucrative social networking field.
  3. Google’s competitors are circling Android like a pack of hungry wolves. Microsoft and Apple are suing Android phone manufacturers HTC and Samsung for patent infringements and Oracle is suing Google outright. Knocking down Android will knock Google off its grand strategy to dominate both mobile computing and social networking.
  4. Motorola, though an early Android adopter, is showing its interest in suing HTC and Samsung as well for patent loyalties. If that were to happen, Android would become involved in a patent quagmire.

In one audacious stroke of genius, Google’s purchase of Motorola Mobility has resulted in Google’s acquisition of a portfolio of 17,000 patents — patents that have been accumulating since the day that Motorola was a manufacturer of car radios. Google’s bold move has just ensured Android’s survival by assured mutual destruction. Now,Google has the arsenal to go after Apple and Microsoft for patent infringement as well.

There is no guarantee that Google will be successful in its quest to dominate mobile computing and social networking, but the odds of that happening have just improved significantly. S&P’s downgrade clearly indicates that some Wall Street analysts just can’t understand anything beyond next quarter’s earnings!

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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