New stock pick: Long Google (GOOG) & Short AOL (AOL)

By: ispeculatornew
Date posted: 05.31.2010 (4:03 am) | Write a Comment  (5 Comments)

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Google has been front and center on this blog in recent weeks. And this week is no exception with a new stock pick and a couple of upcoming posts about the search giant.

Is it because I have fallen in love with Google?

Maybe. But I am also trying to understand Google’s dramatic decline so far in 2010. Sure, Google lost a major battle in China and is almost out of the market. But it’s not like this market had made a major contribution to the company’s revenues and profits.  And Google does have a lot of support among the US government, so even that story could end up turning around. But even if it doesn’t, Google remains a company that has so much more potential than AOL in my opinion. It is behind what could arguably be the best operating system for mobile phones (and some say the fastest growing), has just started a global alliance with Sony to launch Google TV, is the king of online video thanks to Youtube. There is one missing piece right now, and that is social web of course. But a company with the financial resources of Google has many ways of solving the problem. Right now, the solution seems to be pushing hard on Buzz. But it could at any point try to get a deal done with Twitter (Facebook does not look for sale right now).

No… I’m not a fan of AOL…

AOL on the other hand is an internet company that I have been bashing on for a while. I did have some more positive words for Yahoo in this week’s edition of IntelligentSpeculator Premium (although I remain short) but AOL continues to look doomed in my opinion. I would compare AOL to those old airlines like United Airlines & Northwest in the airline industry. They can always try to reinvent themselves but if the overall structure of the company is old and non-competitive, they will never catch up to newer and better competitors.

Could anyone argue me about the fact that Google is a much more dynamic company than AOL? Seriously? Even numbers don’t lie. Revenues for Google are up 8.51% over the last year. Not anywhere near what is needed. But compare that to a 21.81% decline for AOL. One of the main criticisms made towards Google is how dependent it is on Online Advertising. That is true but it is even more so for AOL which is So how can the P/E ratio be as follows:?

Price/Earnings Ratios

TickerNamePricePE RatioPE Next YearReturn YTDSales GrowthAnalyst ratingBook ValueBetaRevenue/ShareSales 5Y Avg GrowthEPS 5Y Avg Growth
MSFTMicrosoft Corp54.3522.6617.78-1.357.7749.691.2211.443.91-3.99
EXPEExpedia Inc114.352.6317.1-7.8315.774.1432.371.1651.2618.34N/A

That is such a small difference for two companies that are a few worlds away from each other. Google has a lot not going well but many different things could turn around. As for AOL, the main thing that could take off is the Local Patch network. But that is not a revolutionary idea and it will face stiff competition from Google, Yahoo and others in the local web.

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5 Comments

  1. Comment by The Financial Blogger — May 31, 2010 @ 12:53 pm

    Google has been going up and down for a few years now. I really like the company and the fact that they have so much liquidity will only help them going through the recession (and probably make a few acquisitions at the same time!).

    I’m looking forward to see how this trade goes.

  2. Comment by Craig — May 31, 2010 @ 3:16 pm

    Hey IS,

    Do you think Google stock reacts the same way RIM used too a few years ago?

    Aren’t they too focused on the search engine and just missed the social medias such as twitter and facebook?

    Sounds like RIM who concentrated on their blackberries and forgot about the cool stuff such as the iPhone.

  3. Comment by IS — May 31, 2010 @ 6:14 pm

    @TFB – Yes, it’s been a roller coaster, I think you had picked Google in last year’s stock pick competition or am I wrong? That had been a pretty decent pick no?

    @Craig – Wow, love the comparison actually. I do not think that Google is as “bad” with these new social media things but I love the comparison, thanks for bringing that up, might inspire a new post:)

  4. Comment by Doctor Stock — May 31, 2010 @ 10:20 pm

    Google is hands down better than AOL… I think Google’s “failure” in China shocked a few people. After all, Google was the perfect child until recently. A good shake out is good… allows people another opportunity to get in at a great price.

  5. Comment by IS — June 1, 2010 @ 8:15 am

    @Doctor Stock – yes absolutely, I’m not certain however how much of an impact this had. Google’s decline has been much greater than any logical decline in my opinion… It’s not as if China was a huge portion of Google’s revenues…

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