The Rising Influence of Rising Affluence

[DewDiligence]

Barron’s says, GOOG, yay, MSFT nay:

http://online.barrons.com/article/SB50001424053111904034104578058621652292356.html

…Windows 8 arrives amid fast-growing markets for smartphones and tablets that can do many of the things the personal computer does, making this round of Windows and PC sales more challenging for Microsoft (ticker: MSFT), chip vendor Intel (INTC), and PC makers, such as Dell (DELL).

You can see the struggle in Microsoft's first-quarter results, filed Thursday afternoon…. To understand why that is happening, ask yourself: Why would I buy a computer?

…The answer to the question of why one should buy a computer these days is likely to be more varied, from "I need a tool to start my small business" to "I want to surf the Web" to "I want to check Facebook and send e-mail" to "I need to take notes in class." Some of these tasks might require a PC, but in many cases, a tablet or smartphone will do.

In emerging markets that lack well-developed connectivity, the answer may be simply, "I need something that comes with a wireless data connection." Something like a smartphone, in other words.

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Google, one of the purported winners in our story, is running headlong into that crisis of profits…. It was marked by a 15% decline in "cost per click," the rate Google gets for search ads. The shares closed down roughly 2% Friday, at $681.79, after an 8% drop Thursday.

…Google has little choice. On the one hand, its ad rate is declining precisely because the use of smartphones and tablets is eating into Internet search on traditional PCs, and the ad rates on mobile devices are much lower. Mobile "clicks" for Google may be stealing as much as 10% of desktop activity, says Piper Jaffray's Gene Munster.

It doesn't sound as if Google should be selling tablets to help the very trend that is eviscerating its ad profits. But we are in an age when companies are rewarded for dominance in an industry…. Google cannot afford not to remain in the forefront of mobile, even at a cost to profit today. Like Cortés in the New World, Google must burn its galleon to show that it will not turn back.

All that would be a lot harder to swallow if Google hadn't just dropped 12% from its 52-week high in the span of a couple of weeks. Trading at 11.6 times next year's profit, after backing out $136 per share in cash and investments, the stock is not all that demanding.