Opposing Views on Gold and GOOG

I have recently been critical of both gold and Google (GOOG). In the interest of presenting multiple views, here are a couple of articles disagreeing with what I have been saying lately.

Gold: http://money.uk.msn.com/investing/articles.aspx?cp-documentid=154762364

The basic premise here is that since we are still at a time when central banks seem to be focused on devaluing their currencies in order to boost exports. I would agree that in the short run this provides some support to gold. Still, I don't buy the win-win scenario for gold because if gold is truly an asset class for all seasons, even a marginally efficient market would have already priced it as such. The risk to gold is that if stable economic growth is restored without an major outbreak of inflation it will suffer horribly. A restoration of 2-3% inflation is not bullish for gold. However, this author makes his case and it helps to have opposing views.

Google: http://blogs.marketwatch.com/cody/2010/09/23/googles-headed-to-2000-heres-why/

Now, there the author says that Google is going to $2000 a share by 2020, which would be about a 4x increase. I actually don't doubt that as a possibility, but I would be inclined to take the under on that one. There is plenty of upside for Google and it is true that the major trends are with them, but a decade is a long time in information technology and Google seems somewhat undisciplined in terms of achieving good operating results. I do think that Google makes a great deal of sense as a long term holding as I have a hard time figuring how it doesn't outperform the overall market over the next several years. Google just frustrates me because they could be more profitable than they are if it was a more professionally managed company.

Does Google Actually Care About Its Shareholders?

I found an article from back in July discussing Google's (GOOG) seeming lack of love for its shareholders. I think that this does bring up an interesting point which is that Google's management does seem a bit more interested in some of its more transformative projects than necessarily routinely providing a good return to shareholders. Say what you will about Apple (AAPL), but Steve Jobs never enters a product area without a very good idea how he's going to make money for Apple shareholders.

Google, on the other hand, has sprawled into a variety of areas that I am not sure have yielded the highest possible return on investment for investors. One of those areas is, of course, YouTube. We all love YouTube, but it is a bit of a free lunch as the advertising dollars don't even come close to covering the vast operating expenses. In total, YouTube lost something on the order of $450 million last year. Now, Google may argue that somehow owning YouTube has boosted its ad revenues by X% elsewhere and that has offset the cost. Even if that is true, and that's a big if, it still was not likely the best return on investment Google could have embarked upon at the time.

With Android, Google is winning the war against Apple with Android, which should be fantastic news for Google considering the growth of the smartphone market. However, I think this is a case of where Google management wanted to embark on a more transformative path than a lucrative one. It doesn't charge a license fee for Android, which it developed (and still develops) so it doesn't make money up front. Further, its own attempt at a phone flopped badly while Motorola (MOT) is resurrecting itself on the back on Google's labors.  In the end, I am still not convinced that Google will get more ad dollars through greater usage of its search engine than it would have if it had not entered the market. After all, I think most iPhone users probably use Google's search engine.

Then there are the other projects like when Google planned on giving San Francisco free Wi-Fi, its plans to provide ultra-fast internet to a variety of US cities, a free web browser (which is awesome by the way), and so on. You add this in with not paying a dividend to shareholders despite a monstrous cash pile and you do sit there and scratch your head a bit. Since publicly traded companies have a fiduciary responsibility to try (though most fail) to earn the maximum possible return for their shareholders, I have to question whether or not Google management actually acknowledges this responsibility.

The stock price performance over the past couple years reflects that as well:

There is multiple compression in there to be sure as profit growth, despite the above mentioned problems, has been quite solid. However, this multiple compression is not just a function of a bad overall stock market, but possibly also because investors may not believe that management can continually deliver how they have in the past due to these diversions.