As discussed with Eric Jackson yesterday prior to Google's (GOOG) earnings report, the search king continues to grope for a business to supplement, if not replace, their cash cow. That puts Google in the same position as Microsoft (MSFT), another juggernaut trying to find a way to extend its reach.
Google and Microsoft together have over $100 billion of cash on their balance sheets. Judging by the earnings misses that both turned in last night, Google and Mr. Softie are both willing to take a step back on earnings to invest in the "next big thing." The question for investors is whether or not either or both companies can find that elusive second act.
Jon Najarian of optionMONSTER says the answer for Google is mobility. Anyone who has accidentally clicked an ad while using a smartphone is well aware of the fact that mobile ads are only slightly less annoying than a baby on an airplane. If you're a company like AT&T (T), the best thing you can do with your mobile ad budget is buy ad space for Verizon (VZ).
Najarian says that's the case for Facebook (FB), but "Google knows people are coming to search." The cost-per-click may be low for now, but generating more from the model is simply a matter of refining the way the ads are presented. At least as far as "Doctor J" sees it.
Before the start of November, Microsoft — staid, boring Microsoft — will have introduced a revamped online store; streaming music; a tablet called "surface," designed to compete with the iPad; and a completely revamped version of Windows.
Windows 8 has been gestating for years, not only because of Microsoft's unimaginably glacial pace of development but also due to the fact that it's a whole rethink of the company's bread and butter. PCs may be losing share, but Microsoft is still generating preposterous amounts of cash from IT departments all over the world.
Windows 8 looks and feels totally different than anything ever before seen on a PC. The early reviews boil down to, "It's hard to get up to speed but generally pretty cool." That may or may not be good enough to withstand Apple's (AAPL) almost accidental penetration of the corporate market. If Windows 8 works on surface and other mobile products, then Microsoft wins. If not, things could get pretty ugly very fast.
Google and Microsoft have deep enough pockets to afford a few missteps, but they can't miss industry shifts. Microsoft is getting passed by in just about every category except Office, and Google is in a no-holds-barred brawl for mobile advertising. It's hard to call either company an underdog, but they've got their work cut out for them.
In terms of the stocks, Google has more time to unlock their challenges. In contrast, Microsoft's bet on the farm will be unveiled next week. Neither company is going out of business but, as any shareholder of Intel (INTC) will tell you, dribbling lower month after month is hardly a better alternative.