In the fast-changing world of tech stocks, there are few true buy-and-hold opportunities. Great stocks such as Apple (Nasdaq: AAPL), (Nasdaq: AMZN), Google (Nasdaq: GOOG), Microsoft (Nasdaq: MSFT) and Oracle (Nasdaq: ORCL) come to mind. Few other tech companies have been able to prove themselves year in and year out, on their way to market valuations that can exceed $50 billion or $100 billion.
Yet even among the most elite tech stocks, the myth of a never-ending rise in the stock price really doesn't hold up. Let's forget the dot-com bubble of 2000 for a moment as we take a look at Microsoft, arguably one of the greatest technology success stories of the modern era. Shares of Microsoft peaked roughly five years ago and are unlikely to ever again deliver huge upside for investors.

Why such a glum view? The software giant's sales grew just 5.4% in fiscal (June) 2012 to $73.7 billion, and are expected to keep growing at a mid-single digit pace in coming years. The surest sign of Microsoft's senescence: Operating margins slipped below 30% in fiscal 2012 for the first time in eight years.

The next Microsoft?

For many years, the phrase "the next Microsoft" was always a proud moniker, signaling a newer, younger company's ability to mimic Mister Softee's meteoric growth spurt in its first 15 years as a public company. Perhaps no company lived up to this kind of hype as Google.

Outside of Apple and Amazon, it's hard to find such an impressive growth story. The company only reached the $1 billion revenue milestone in 2003, but had more than $10 billion in sales by 2006, $20 billion sales by 2008, on its way to more than $40 billion in sales this year, and a projected $53.7 billion sales in 2013, according to consensus forecasts.

Investors have surely taken note: In recent months, Google's stock has been scorching hot, giving it a $245 billion market value. It took quite a while, but Google is now worth as much as Microsoft. Might as well change the phrase to "the next Google."

Counter-intuitively, this is the time to cash in your chips on this amazing tech stock. Cracks are emerging in the foundation and investors are set up for the same "dead money" phase they saw with Microsoft after it peaked at the end of 2007.

Here are four early warnings signs for Google that you should heed now:

1. Margins appear to have peaked

It's possible to see the true mark of a bright future in operating margins, as a company is able to generate sales growth faster than expense growth. Yet analysts now say that in the third quarter of the year, Google's operating margins actually shrank a bit from a year ago. The full-year view shows an even starker contrast. Google's EBITDA margins are on track to fall from 32.3% in 2011 to 27.2% in 2012, according to Citigroup. In effect, this is no longer a typical software-driven business model (which is usually characterized by high margins), but instead it's becoming a labor and capital-intensive mature operating company.

2. Peaking search

Though Google is pursuing a wide range of new initiatives, more than half of its cash flow still comes from the core search advertising business. But judging by recent trends, users are no longer conducting searches with rising frequency. The amount of searches on Google rose just 2% in August from a year ago, the lowest year-over-year growth rate in the company's history. It seems as if search advertising has fully matured. It doesn't help that Microsoft continues to challenge Google's dominant market share with the Bing search engine, which launched in 2009. While mildly popular, consistent national TV advertising campaigns have made it Google's biggest competitor in this category, ahead of the once-leading Yahoo! (Nasdaq: YHOO) search engine.

3. Lack of traction for new ideas

Give Google credit for trying many new business concepts. But be realistic that a number of these concepts simply aren't showing any real traction. For example, Google has launched a Netflix (Nasdaq: NFLX)-style streaming movies service, Google Play, yet it has barely made a dent in terms of market share. Google has only had moderate success with Google+: The service reportedly has 100 million monthly users, while Facebook (Nasdaq: FB) now has more than one billion active users each month, according to founder Mark Zuckerberg. In terms of daily usage, Google+ appears unlikely to make a dent in Facebook's social networking dominance.

Google has found, just as Microsoft did years ago, that branching out beyond the core profitable business is a big challenge. The company is surely having success with some of its initiatives, including the Android platform that's used to power a majority of today's smartphones and tablets. But another bonanza-like product or service appears unlikely.

4. The laws of bigness

Google is expected to boost sales by $13 billion in 2012, totaling $42.5 billion, and by another $11.5 billion in 2013. Yet even if the company kept adding that level of revenue each year, then it would represent a steady deceleration in terms of year-over-year growth as "the laws of bigness" kick in. For example, Google's year-over-year sales are expected to rise 26% in 2013. But what lies ahead after that? Analysts at Citigroup anticipate sales growth of just 13% to $60.5 billion in 2014. Merrill Lynch anticipates a slightly better 13.5% growth rate. Goldman Sachs pegs 2014 growth at just 10%.

Even at that point, Google's revenue base will still be smaller than Microsoft's current $75 billion. And as noted earlier, Google is already now worth as much as Microsoft in terms of market value, so don't confuse a surging stock price with surging growth.

Risks to Consider: As an upside risk for investors looking to short the stock, Google may look to deploy its $38 billion net cash position into acquisitions that can keep the top-line expanding at a rapid pace in 2014.

Action to Take --> This isn't to suggest that shares of Google will take a big hit as growth slows. Instead, you need to know the history of Microsoft and many other great growth stocks that are long past their heady days of robust share price appreciation. The fact that shares of Google have risen 30% in just three months gives a false impression of more robust gains to come. These are the kinds of exit signs you should be looking for when harvesting winning investments.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Budgeting

    Plated Review, Is It Worth It?

    Take a closer look at the ready-to-cook meal service, Plated, and learn how the company can help you take the hassle out of home cooking.
  9. Investing News

    How China's Economy is Now Like America's

    China's economy could take the global economy down with it; why that might be good news in the grand scheme.
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center