Google Leaves 'Em in the Dust

10/19/2010 12:00 pm EST

Focus: STOCKS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says that despite some positive moves by competitors, Google retains its dominance in search while branching out into other areas.

With Yahoo (Nasdaq: YHOO) and Microsoft's (Nasdaq: MSFT) joint venture in the Internet search business finally congealing, "the duo have a better chance to take on Google," says The Wall Street Journal’s [Heard on the Street column—“Yahoo May Bring Home the Bacon,” October 13th, subscription required].

While the author admits that it is still an uphill battle for both, advertisers should now "dedicate more time and marketing on the combined business," since they no longer have to manage two separate ad campaigns for Yahoo and Bing.

Initial reports are good, according to data from SearchIgnite, which reveals that advertisers using Yahoo are getting "more clicks on only slightly higher pricing." However, the integration isn't yet complete, with YHOO and MSFT expecting to have their combined might ready to go by the end of the month. Still, the Journal believes that the pair will stand up better united, rather than divided.

While the Journal is correct, it's hard to imagine Yahoo and Bing doing any worse than they are now. In fact, according to the latest ComScore data, Google's (Nasdaq: GOOG) domestic explicit core search market share rose 0.7% in September, while Yahoo's equivalent share fell 0.6%, and Bing's share fell 0.1%.

Outside the search arena, GOOG looks like a much stronger pick, as well. The stock has outperformed the Standard & Poor’s 500 index by more than 4% during the prior 60 trading days. By comparison, YHOO has underperformed the S&P by more than 12%, while MSFT has lagged the broad-market index by roughly 10%.

Even the sentiment backdrop favors GOOG over YHOO and MSFT. Despite GOOG's strong price action, pessimism is thick on the security. For instance, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.22 ranks in the 96th percentile of its annual range.

As for YHOO and MSFT, options traders prefer calls, with the former's SOIR resting just four percentage points shy of an annual low, while the latter's ratio is in the lower half of its annual range.

v While YHOO and MSFT will likely see more revenue growth out of their combined efforts at Internet search, it seems unlikely that much will change in market share. If investors are expecting anything more than meager gains, they could be sorely disappointed. What's more, those GOOG bears expecting the stock to bleed market share may be in for a rude awakening.

(Google’s stock closed Monday below $618—Editor.)

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