It’s been several weeks since my last post. At that time, I was reeling from the beating we took during that dramatic first week of October. Little I knew of what was ahead. Paraphrasing myself: Gosh, what a month!Encouraging performance today. The market was just following the free fall trend that has marked the whole week. At one point, it felt like we would finally close below 8,000 for the first time. And why not? There hasn’t been a single piece of good news in weeks. There is not a glimpse of hope in the horizon. And yet, out of nowhere, we had a tremendous rally. No apparent reason! Except for, indeed, the fact that enough is just enough. Yes, we are in an economic recession. But most stocks are priced as if the world was going out of business. There is value out there, folks. I guess a few shrewd investors brave enough to see the sun beyond the stormy clouds had the same thought.
When I am considering a stock for investment, I want to think I am not buying a company or even a product. What I am buying is positioning. One way of defining positioning is the space that the combination of functional and emotional values of a brand occupies in the perceptual map consumers have of any specific category. That perceptual space will sooner or later translate to sales. The bigger the space, the more sales that brand or product will generate, and for a longer time.
You want to look for brands that occupy a very big and/or growing space in a large and/or growing category. Also, the bigger the space the brand occupies, the less space is available for the competitors, therefore adding longevity to that brand’s business potential.
Now, let’s talk of a very specific example: Google (GOOG). Online search is a very big category. We all live around the Internet nowadays. From finding out about the weather today, to planning our next vacation, to –yikes!- checking the financial news every 20 minutes to try to make sense of the madness we are living in these days. Now, how do we say when we suggest someone to do a search in the Internet? I haven’t heard anyone telling me to “yahoo” something. Nobody has ever mentioned that they found their long-lost third cousin while “Microsoft-living” his or her name on the net. We all “google” our information. Google occupies a huge space in the mind of the consumers when they think of finding information in the web. Google is the positioning leader in the all-important online-search category and they keep working relentlessly to make that space even bigger. In the meantime, Yahoo (YHOO) is struggling for survival and trying to re-kindle their affair with Microsoft (MSFT), while the latter is still figuring out how to convince the world that Vista is not the dud it is.
Advertisers know that. Heck! So do you! I guess that’s the reason why Google was commanding such a rich P/E, right? And then the recession comes, and with all its doom and gloom, we assume advertisers will cut their budgets, people will stop searching, and then we send Google to its lowest price in three years. To that, I want to highlight a few things:
- In a tough economic situation, advertisers indeed cut their advertising budgets. But they don’t eliminate them. You can’t afford to. You need to keep selling! If any, you re-direct your reduced budget to the most effective touchpoint you have available. If you had campaigns going in Google, Yahoo and Microsoft, you cut the last two and put all your money behind Google. That is a fact.
- Consumers stop buying. But they keep shopping. It is part of the coping mechanism. More than half of the thrill of buying something is actually shopping for it. We all make hopeful plans of what is that we would like to buy once our portfolios rise again from the underworld. And Internet searching (with its payable clicks) will continue to be the prime means to do this.
- When the going gets tough, the tough get going. This economic crisis will only consolidate Google’s leadership in the web search space. It is the only company in the space with the resources and the strength to thrive in these conditions. You will see smaller rivals (including Yahoo) retrenching and cutting back in their investments. Google will keep plowing ahead, taking advantage of the situation to consolidate its dominance.
Today, Google dipped below $300. It got all the way down to $280 at the bottom before rebounding to close at $312 (encouraging!). When you consider that Google can only consolidate and strengthen its position as the absolute leader in a category with a double-digit compound growth in the foreseeable future, I would say that is a small price to pay for such a Company. It is not about what could happen in the next few months. It’s about owning the Internet for the next decade! And that is a very, very big space.
Disclosure: I own shares of GOOG
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