Is Google Stock in Trouble?

While the U.S. equity markets are sitting at or close to all-time highs, it hasn’t been nearly as impressive a ride for Google (NASDAQ: GOOGL). Shares of the search giant are down 5% in the past two years, which is well below the 14% return for the S&P 500 index.
Google is undoubtedly the leader in its core search engine industry, and it’s still growing and highly profitable. Still, Google is showing some cracks in its armor. Among these, the company has seen stiffening competition in the search business, as well as a lack of meaningful growth in new areas.
At the same time, it has a mountain of cash on its balance sheet. With such poor price performance for Google stock, investors are starting to take a closer look at that cash pile – and rightfully so. Unlike many of its peers in the technology sector, Google does not pay a dividend.
While Google is still a tremendous business, its slowing growth is a concern. Because of this, the company should initiate a dividend to reward shareholders until higher growth resumes.
At the end of last quarter, Google’s cash and marketable securities totaled $65 billion, up from $59 billion at the same point last year. Meanwhile, Google’s growth is slowing down. The company revealed first-quarter earnings last month that missed analyst estimates on several measures, and the stock fell nearly 6% after reporting. Costs per click fell 2%, and the number of paid clicks rose 17%, missing forecasts for a 23% increase.
Google is facing a couple of key challenges. First is that more search traffic is taking place on mobile devices, which is less profitable to the company. Second is that search itself is becoming a tougher business.
The online browser Mozilla recently switched over to Yahoo (NASDAQ: YHOO) for its search engine. In addition, even Microsoft (NASDAQ: MSFT) is taking share in the search business. Its search advertising revenue grew 21% last quarter, as U.S. market share for its Bing search engine widened by 150 basis points year-over-year.
Until Google gets back on track, it can easily monetize its cash holdings to benefit its loyal shareholders. The company’s cash balance amounts to approximately 18% of its market capitalization. That equates to about $94 per share. All that cash is burning a hole in Google’s pockets.
With interest rates still near historic lows, Google isn’t earning much on the cash parked on its books. It could easily utilize half of its cash to either pay a significant dividend or announce a large buyback.
In terms of a buyback, Google could use half its cash pile to repurchase as many as 61 million of its own shares. That would reduce its diluted share count by about 8% and significantly boost its per-share earnings.
Or, Google could pay a one-time special dividend of as much as $47 per share, which would instantly provide shareholders with an 8.8% return. This would effectively make up for its stock price decline in the past two years, and then some.
Google has resisted calls to pay a dividend, preferring instead to utilize a greater portion of its cash for research and development. Indeed, it allocated more than $10 billion to R&D in the past four quarters, which amounted to approximately 15% of its revenue in that period.
That is a greater R&D spend, as a percentage of revenue, than many of its technology peers. For example, Apple (NASDAQ: AAPL) put about 3% of its trailing 12-month revenue toward R&D.
Google is widely renowned as a technology innovator, but the success of all this research spending can be debated. The company hasn’t reaped many rewards from its side projects in recent years. For example, it has tried out several initiatives which have not panned out, including self-driving cars and Google Glass.
Moreover, Google’s track record of creating value through mergers and acquisitions is spotty at best. Its acquisition of Motorola Mobility in 2011 for $12.5 billion and its subsequent sale of the company this year to Lenovo Group (OTC: LNVGY) for $2.9 billion is one example. Poor decisions like these destroy shareholder value.
The bottom line is that there is little reason for Google to hold such a huge amount of cash on its balance sheet, especially when that cash is not benefiting shareholders. It could easily pay a special dividend or announce a large stock buyback and not miss a beat.
DISCLOSURE: I personally own shares of Apple (NASDAQ: AAPL).

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