A Research Case Builds Against Google (GOOG, MSFT, YHOO, AAPL, RIMM, ORCL, VZ)

Google Inc. (NASDAQ:GOOG) earned an ‘underperform’ rating and a $525/share price target from Wedbush Securities as the investment firm started coverage on the world’s leading search engine. Wedbush cited strong competition from Facebook and an increasingly fierce competitive landscape in mobile search as the primary reasons for the rating.  The implications and what was not said may be just as important as the case laid out in the research call.

It is true that Google remains in the sights of a diverse herd of followers. Microsoft Corp. (NASDAQ: MSFT) and Yahoo Inc. (NASDAQ: YHOO) are creeping up on Google’s dominant position in search. Apple Inc. (NASDAQ: AAPL) and Research in Motion Ltd. (NASDAQ: RIMM) are among the competitors for smartphone operating system dominance, and Oracle Corp. (NASDAQ: ORCL) has just filed a major patent/copyright infringement lawsuit against Google. The only friend the company might have right now is Verizon Communications (NYSE: VZ), which has reached an agreement with Google on mobile broadband access (net neutrality).

Painting a bulls-eye on yourself is what happens when you dominate one market and are making a lot of moves to enter others. The new Comscore July search numbers are out today, and Google’s share was down slightly from 66.2% in June to 65.8%. Yahoo gained a bit, from 16.7% in June to 17.1% in July, and Microsoft’s Bing search engine stayed flat at 11%.

Wedbush sees a far greater threat from Facebook’s nascent social semantic search tool called Open Graph. According to Wedbush, Facebook is “already driving more traffic to some leading Web sites” than Google and “is poised to dramatically grow its share of traffic generation just based on clicks from user news feeds.” There’s no arguing that Facebook’s 500 million members have an awful lot of clout, but Open Graph has raised some privacy concerns that have not yet been fully addressed by Facebook.

As far as mobile operating systems go, Google’s Android has gotten some serious traction this year and has recently surged to third place in new shipments. Wedbush sees this move as a positive for Google, but does not believe that Android and other Google businesses will comprise even 10% of the company’s 2010 revenue.

Wedbush did not even consider the possible effects of the Oracle lawsuit filed late last week charging Google with seven patent violations and copyright infringement on its Java virtual machine running on the Android platform. This is a very serious threat to Google’s entire mobile strategy. Oracle has put Google in the position of having to settle, and admitting to some wrong-doing, or fighting it out in court, which will keep the charges in the public eye for months or, more likely, years. Worse, from Google’s point of view, would be the defection of smartphone makers to other operating system platforms.

Google does have its share of challenges going forward, and Wedbush has pointed out several of Google’s soft spots. It’s major challenge could be focusing on which of the soft spots to defend vigorously and which to use as cannon fodder. As much as it might like to think so, Google is probably not capable of attacking everywhere and defending everywhere at the same time.

Paul Ausick