Is Google Misstepping?

Saturday, January 09, 2010

Hat tip Jesse Felder of My Back Pages
It's been a big week for the "Big G." First the company introduced the official Google phone, dubbed "nexus one." It was designed by Google and is manufactured in partnership with HTC (and is number one on my personal wish list). It is also being sold directly by Google and unlocked so that it can be used on a variety of networks, an obvious boon to users but a snub of its main Android partner, T-Mobile.

Now that the company is competing with the handset manufacturers AND shunning the wireless providers by refusing to choose an exclusive partner there has been speculation that Google may have an interest in establishing a wireless business of its own. Why the company would want to dilute its phenomenally profitable, core business in this way is beyond me.

Today, we find out that Google has applied for federal approval to establish an energy trading arm to better manage the company's burgeoning needs. So Tuesday they want to be WorldCom; Friday they want to be Enron. What's next? A massive hedge fund?

This sounds to me like a company with more cash than they know what to do with. The company's management has a duty to shareholders to put this cash to use in the most effective way possible. Instead of these new initiatives, the company could have bought back a huge chunk of stock last Spring when it traded below $300 or started paying out a fat dividend.

Surely, the return on capital of these new ventures won't be nearly as high as the company's core business. And if it turns out that Google's no better than your average wireless provider or energy trader, shareholders should hold the company accountable.
I have often wondered how far the monetization well goes in the online search engine business but Google has repeatedly showed me I have undervalued it time and again. The growth has been phenomenal.

Yet, Jesse makes a great point about Google's outsized cash position, $22 billion as of September 2009. Quite often, companies fail to effectively put cash to work on new initiatives. While Google with its nearly 20,000 employees has created and purchased some of the best programs on the web (Gmail, Reader, YouTube, Picasa, etc.), investments into a wireless grid and an energy trading arm seem far-fetched. Are they missteps? Only time will tell.


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