Jason Kelly

Dan writes:

I see you haven't bought Google yet, despite all your positive articles about it. When do you expect to buy, and will you put on your website when you actually place the order?

The Kelly Letter has owned Microsoft and Yahoo for years, and is sitting on modest profits in each. My reason for owning Microsoft was to capture upward momentum from its Windows/Office upgrade cycle that started last year; for owning Yahoo it was an eventual recovery as it streamlined and improved its competitive position against Google. I thought Yahoo was a bargain compared to Google, and didn't like Google's over-reliance on advertising for profits. Remember, some 99% of its profit is from ads.

When Google kept climbing last fall to $747 on November 7, it looked far too overpriced to me. Its MACD was over 37 and its relative strength was 86 -- both stratospheric and screaming for a correction. Part of that rally came from Jim Cramer, who in October raised his price target to $750 but called even that "a total and unequivocal lowball estimate" considering the growth potential. He said a more reasonable estimate was $900. He'll be right someday, but there was no way it was going straight there from early November's precarious peak.

So, my initial hesitation with Google was two-fold. One, I was betting on Yahoo to get itself back on track. Two, I was convinced that Google was overpriced and vulnerable to some kind of setback. I was not prescient enough to know that the market would crash as far as it did in January, nor that Google would be so punished for its slowing click rates and so on. Thus, some of the good timing was just luck (and always is, no matter what anybody tells you). However, when a stock is as out of oxygen as Google was last fall, it doesn't take much to knock it down. I knew that, and held back until something happened to it.

Then, my attitude toward Google changed. What did it was Microsoft's bid for Yahoo. To me, that marked the end of Google's serious competition online because I believe that both Google and Yahoo are working on internet-based operating systems with the potential to make Windows unnecessary, and that that's the real reason behind Microsoft's buying Yahoo. It's not actually just about advertising -- although it is somewhat, of course -- it's really about bulking up for a long war against Google for control of software-as-a-service (SaaS) computing that's going to take the world by storm any year now.

I found on SnapSheet that Google Apps's revenue has gone from $0 to $400 million in just three years. It's up ten-fold from just a year ago. Granted, $400 million is still a small figure compared with Microsoft Office's $18 billion revenue, but with its blistering rate of adoption you can be sure Google Apps won't remain a mere annoying gnat for long. Also, have you used Google Apps or Docs? I already run my business with Google Docs and, let me tell you, it's fantastic.

Furthermore, I think Microsoft's proven ineptitude online is going to destroy or at least hobble whatever chance Yahoo had against Google. Thanks to Microsoft, Yahoo is on the same path to oblivion now sporting AOL's footprints. In a few years, I think we'll see the Microsoft/Yahoo conglomerate as an online dud with a smaller share of online search than they have now, an absurdly bloated online version of Office that's outflanked in every regard by Google Apps, and an operating system from Google that's a genuine alternative to Windows.

Aside from recent events, I'm fed up with Microsoft as an investment. Steve Ballmer is no Bill Gates, at least not judging by stock performance.

Microsoft has basically been dead money for five years. Since Steve Ballmer became president in January 2000, MSFT has lost about half its value. Now, he took over at the top of the internet bubble, but even if we clip off the bear market years and just examine the stock's price from, say, the beginning of September 2003, it's still down 4%. In that same time, the S&P 500 is up 30% -- even after the recent market trouble.

Given all of the above, The Kelly Letter is looking to sell both Microsoft and Yahoo at profits, and move the proceeds into Google at a cheap price.

We've been patient with Google and are hoping that investors see the Microsoft/Yahoo merger as a big threat to Google so that the GOOG share price keeps dropping. When it gets low enough, we'll begin buying.

As always, I will tell subscribers when we place the order and at what limit price. Join us!

Labels: GOOG, MSFT, YHOO

Posted by Jason Kelly at 5:47 PM Japan time
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