What Is Google?

Shares in Google (GOOG) dropped almost 5% today, reaching their lowest point in almost a year. This is odd for two reasons. First, today was actually a good day for the stock market. It was also a good day for the technology sector, thanks to IBM’s announcement of a $15 billion stock buyback plan. So what’s wrong with GOOG?One possible answer is that GOOG is really not a technology stock. Before you call me crazy, think about it for a minute. Exactly what constitutes a tech stock these days? Just about every business uses computers and the Internet now. The banking industry, for example, would grind to a halt if their computers all stopped working. Ditto for airlines. Ditto for the stock exchanges, and utility companies, and even many retailers. Every company depends on technology now. To various degrees, every company produces technology, as well. Stock analysts spend their days designing spreadsheets. They are, in effect, writing computer programs. Is Merrill Lynch a technology company now?

Obviously there must be a better way to define what is and is not a technology stock. Here’s an idea: where does the company’s revenue come from? Is it selling computer hardware or software? Ok. So what does Google sell? Not software. Not hardware. What it sells is advertising. Google is a media stock, not a tech stock. Think of it this way and the picture begins to clear up. Google depends on advertising revenue. If fewer ads are placed, or the price of advertising drops, Google makes less money.

Now consider what’s happening in the economy. Consumer spending is slowing. The housing market is in a near-meltdown in some parts of the country. Banks have tightened credit and are making fewer loans. Ever notice how many ads on your favorite web page are related to mortgages and credit cards? You’re seeing fewer such ads these days. And that’s bad news for Google.

I have no doubt that Google will remain a great company and a great stock to own in the long-run. The short-term looks a lot shakier as the company’s dependence on economic growth is exposed for all to see. If you own GOOG shares, now is a good time to keep a close watch on them.