Investors can prime their portfolio for success by building on a collection of core growth stocks. These are remarkable businesses with the potential to deliver a decade or more of great returns. But to be considered a core holding a company requires 1) a sustainable competitive advantage and 2) a visible growth trajectory. In this series I’ll present seven companies that can perform that role.
Google Inc (NASDAQ:GOOG) is a remarkably successful company building a cash flow machine online while consolidating its strengths in new products and technologies. The company is well positioned in emerging technologies and has the potential to deliver superior growth over the next decade.
Why it’s a core stock
Even famed investor Charlie Munger has admitted ‘Google has a huge new moat. In fact, I’ve probably never seen such a wide moat.’
Great businesses dominate their respective industries, and there’s no doubt Google Inc (NASDAQ:GOOG) dominates search. According to a report by ComScore, Google owns nearly 70% of the U.S. search market.
In this industry market share represents a competitive advantage allowing Google Inc (NASDAQ:GOOG) to use historical searches to improve future results. Google is a better because it’s bigger. Google is bigger because it’s better. This type of network effect feeds on itself and prevents competitors from gaining ground.
Microsoft Corporation (NASDAQ:MSFT) has tried and failed to build a viable competitor to Google Inc (NASDAQ:GOOG) through its Bing search engine. But after five years and burning $10 billion in its online service division, the company has little to show for its efforts. Last quarter, Bing lost $283 million. Worse, Microsoft Corporation (NASDAQ:MSFT) has only a minimal presence in mobile search, which is where all the growth is.
But while Bing is gaining some traction, most of this is coming at the expense of Yahoo! Inc. (NASDAQ:YHOO). Since 2007, the company’s share of U.S. desktop searches has declined from 28% to 12% today.
How did Yahoo! Inc. (NASDAQ:YHOO) fail so miserably? Fundamentally the company has never defined a vision of who it wants to be and who it wants to serve. Through a series of failed acquisitions (e.g. Flickr, del.icio.us) the company has withered away its lead in the industry.
Yet despite its top position, Google Inc (NASDAQ:GOOG) continues to widen its lead over competitors. Projects like Android and Chrome are designed, not to produce profits, but rather to direct traffic to its search engine and protect the core business. Because these services are given out for free, Google isn’t just building a moat but salting the earth within a 10 mile radius of the company to ensure no competitors can set up shop.
And these competitive advantages have translated into big returns for investors.
More importantly, Google Inc (NASDAQ:GOOG) is well positioned to exploit some of the biggest trends in the technology space.
Mobile ad spending grew 47% in 2012 to $1.8 billion. According to estimates provided by eMarketer, mobile ad spending is projected to grow to $4.5 billion by 2015. Because the Android OS commands 75% of mobile devices worldwide, Google will capture most of this growth.