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3 Things Google Bulls Should Worry About

After climbing 25% so far this year, Google (GOOG) is sitting at the top of the tech stock heap. Analysts love it, mutual funds love it and some hedge funds have even sold shares of Apple (AAPL) short and used the funds to leverage up their bets on Google.

At least so far, Wall Street has steered investors correctly. Over the past two years, not a single analyst tracked by FactSet has issued a "sell" rating on Google. Currently, 70% of the 46 analysts following Google rate the stock a "buy" and the remaining 30% rate it "hold." The proportion with a "hold" rating has doubled since mid-2011.

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Apple vs Google

With Google basking in nearly universal love from investors, it's probably a good time to ask what could go wrong. So here are three concerns for investors to ponder:

Overvaluation

Google has demonstrated reliable gains in revenue and profits but the stock has gained even faster. That's left shares at a stretched valuation, according to Laurence Isaac Balter, who runs Oracle Investment Research. Balter made his name urging investors to sell Apple last August just before it peaked.

Google's price-to-earnings ratio of 26 is among the highest in the S&P 500 and well above peers such as Apple and Microsoft (MSFT). Even if the ad business remains strong, the market valuation is overextended, Balter warns.

His models compare the rate of a company's profit growth against stock price moves. When the two get out of whack in either direction, the model signals a buy or sell.

"I'm not here to knock the company," Balter says. "This is more about price versus profits." His "fair value" target price for Google, trading at almost $900, is $700 to $750. He recommends investors buy Apple, which has seen its stock price lag gains in its underlying business.

Shifting markets

At least so far, Google has been one of the the biggest beneficiaries of the shift to mobile computing, thanks to the popularity of its Android OS for phones and Youtube site for videos. Ad revenues from mobile should total almost $9 billion this year, double last year's take and more than five times 2011's.

But competitors such as Facebook (FB), LinkedIn (LNKD) and Twitter are growing ad revenue even faster. Competitors are also moving to shut Google out. Apple is shifting to Bing for Siri search results on iOS 7. Facebook tried an Android phone overlay, Home, to obscure Google. It's been a failure so far but will surely be revamped. And Twitter has reserved searching of past tweets for itself.

And there's also the risk that growing usage of specialized apps will increasingly displace plain old search in many areas — Zillow (Z) for real estate, Yelp (YELP) for restaurants and so on, says David Ristau, president of the Oxen Group.

"Maybe the so-called ironclad ad revenue is not so ironclad," Ristau says. "Sure, the company is dominating search, but people are finding other ways of using its time on the Internet — using its phones, Facebooking and even using Linkedin."

Consumer dissatisfaction

Microsoft has been running search engine comparison ads, which purport to show that web users prefer results from Bing to those from Google. Aaron Harris, CEO and co-founder of Tutorspree, was getting fed up with Google pushing too many of its own products. So he took measurements to prove that the search results consumers sought were becoming increasingly marginalized.

His findings? Only 13% of screen space in a typical desktop search is devoted to actual search results. On iOS, the problem is even worse — an iPhone user has to scroll through four full screens of ads and other links before reaching actual search results. That could eventually provide an opening for competitors to pull a Google on Google. After all, the company took off a decade ago by offering "pure" search results on a mostly white page.

To be sure, Google's main search ad business remains a juggernaut, YouTube is gaining with the mobile set and Android is the smartphone market leader. In fact, Android's still gaining on the iPhone among Internet searchers as it has for the past three years. But Google's share price already incorporates a lot of optimism. If the trends start to come undone, investors should beware.

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