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Why Google Seems Wired and IBM Seems Tired

Stocks in this article: GOOG IBM KO

NEW YORK (TheStreet) -- One great way to analyze Google (GOOG) is to contrast it with IBM (IBM - Get Report).

Both companies dominate a niche.

IBM dominates in mainframes, which are still sold for high-volume applications such as transaction processing. The relative value of that dominance, however, has been falling and will continue to fall, as the move to cloud computing accelerates.

Google dominates search, which means it dominates advertising. The relative value of that dominance keeps growing, and it's Google that has led the move to the cloud.

The impact of this has only come to investors in the last few years.

Both companies more than doubled in value from the depths of recession in early 2009 to the start of 2012. But since the first trading day of 2012, Google's shares are up 70% while IBM's are up just 4%. Investors are now willing to pay about 31 times Google earnings for a share of its stock. IBM's P/E is a market-trailing 13.

Google's money machine lets it engage in speculative development ventures such as  Google Glass. I laughed when co-founder Sergey Brin first started showing these, but they're starting to turn into a real product, with this week's Consumer Electronics Show appearing to be a "wearable electronics" festival.

Wearables are the next step beyond devices, and Google aims to dominate devices by being the low-cost provider. Although more than 80% of Americans now use the Internet, market researcher Asymco notes, only one in three do worldwide. 

By being the low-cost provider of both Internet services and devices, through its Android line, Google hopes to catch the largest share of global Internet growth. Outside China, which still tries to remain closed to Google's embrace, the company brings $1.20 to its bottom line from each Internet user every quarter, Asymco says

Just as IBM's marketing-first approach made it vulnerable to the first "kid with a clue" in the 1990s, the kid then being named Bill Gates, so that same approach, applied to software and services, has made it vulnerable to another kid with a clue in this decade, a kid named Larry Page, who turned 40 last year.

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