(The following commentary comes from an independent investor or market observer as part of TheStreet's expert contributor program.) "If we can't find things within our circle of competence, we don't expand the circle." -- Warren Buffett While the quote above by Warren Buffett refers to his portfolio and the idea that some investors make the mistake in thinking that they have to be "constantly invested," that logic can also translate to market timing and life in general. Buffett would recommend not only that you buy only what you know in terms of investments, but more importantly, wait for your "right price." If a stock or something else you want to purchase is not available at the right price, the alternative should be to wait or simply not buy at all. It makes perfect sense and speaks to the many aspects of not only that which helps formulate our investment decisions but also that which keeps investors from falling into traps. As fundamental in principle as all of that sounds, it is certainly much easier said than done, not only for individual investors, but remarkably, for large businesses as well.
One company that has yet to appreciate this idea - at least to the extent that I think it should have, is search giant Google ( GOOG). The company often forgets just how dominant it is not only in search, but also online advertising, smart phones, tablets as well as cloud computing. Google often appears to operate with a chip on its shoulder and always appears unsatisfied as it seeks to be everything that its chief rival Apple ( AAPL) is often considered to be. While the company plays second fiddle to nobody, sometimes I believe Google maneuvers with the mindset of a startup by constantly seeking to expand its circle of competence -- if not to compete with Apple, and then there is always Microsoft ( MSFT). These days, Google also finds itself looking constantly over its shoulder at social network sites such as Twitter and Facebook - even more now as the latter is due to file its highly anticipated IPO. The question is, will Google be forced to further expand its circle? The company realizes that it has a lot to prove. But everyone except Google realizes that this is all in Google's own mind. The end result was a disappointing fourth quarter as its profits failed to meet expectations. And the market was not pleased -- the company saw its shares drop nearly 9% sinking below $600 for the first time in months.
Looking Up in First Quarter
In the first quarter of this year, however, Google reported better than expected first-quarter profit of $10.08 per shares versus analyst estimates of $9.64 - this is according to Bloomberg data. Excluding revenue passed on to partner sites, sales rose to $8.14 billion, matching estimates. The company's gross revenue grew by 24% to $10.6 billion on an annual basis and 1% sequentially. The company's website revenue also grew by 24% to $7.3 billion. What also caught my attention was the better than expected performance of its network - something that I don't think the company gets enough credit for. Its network revenue was up 20% year-over-year to almost $3 billion. This was an initiative that I once considered "outside of its circle of competence." And I think the company deserves a considerable amount of credit for having executed in a manner that its network business not only has become a viable part of its operation, but is has outperformed other areas in its portfolio of services that were once more dominant. Overall, I have to say that I was impressed with the first-quarter performance. The company was eager to prove that its less-than-stellar Q4 showing was an aberration by demonstrating not only better overall execution for Q1, but also that it has re-established a focus - and by and large it met its objectives. I have always referred to the company as one of a handful of Wall Street firms that aspires to put smiles on people's faces, but amazingly it has not operated as one that has been particularly happy with itself. And for Google, I don't think it will get any easier after Facebook's IPO, as the company's battle with what I perceive to be a tremendous case of corporate insecurity will only increase to another level.
From an investment standpoint, I will say that Google is one of those companies that should be rated "buy" at any level because it makes tons of money and is arguably one of only a handful of companies that can support its valuation and growth expectations regardless of what the market does. When one considers the company's true growth potential and the fact that it grew over the past three years under significant market and corporate pressures due to slower advertising expenditures, the stock remains relatively cheap at $624 with a price-earnings ratio of 21. For value investors with 12-24 month investment horizons looking to expand their circle of competence, Google is certainly one stock to consider.