Google Looks Pricey Above $700 As Competition Looms

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Google's ( GOOG ) stock hit $700, on September 7th, for the first time since 2007, adding another high to its impressive rise from $570 at the beginning of July. While the stock, from its July levels was moving towards our price estimate of $660, we think that it has run too far in hitting $700. We stand by our $660 valuation and will look at the possible causes of the difference between our price estimate and the market price below.

We think the market is, in contrast to us, more bullish on Google's growth opportunities. Specifically, it seems that the market overestimates Google's mobile revenues and the number of searches that will be conducted on PC's. Additionally, we think that the market is underestimating the increase in competition that the company is facing for all of its products, and the impact that this could have on revenues.

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Mobile Revenues Outlook

While we agree with mobile revenues will be a big driver of growth for the company, we think that it is ignoring some headwinds facing Google. Overall, we think that the market believes that Google is in the process creating a mobile ecosystem which will be alongside Apple ( AAPL ) in terms dominance. While this already exists to some extent with the Android platform, Google's revenues from mobile devices primary come from advertisements not hardware sales. Therefore, to drive substantial revenues from the creation of an integrated ecosystem Google will have increase its revenue per search (RPS) on mobile devices. While we forecast RPS to increase, we think that the market might be too bullish on the impact that an integrated ecosystem would have on RPS.

Additionally, we think that Google might not be able to create the ecosystem that the market thinks it can. First, Apple's win against Samsung (PINK:SSNLF.PK), currently Google's largest Android partner, can dent the company's prospects of gaining market share in the US. If customers can't buy high end Samsung Android smartphones, they might switch to Apple iOS or Windows OS based devices. Second, the recent move from Amazon ( AMZN ), which chose Bing as the default search engine on its Kindle tablets, could start a troubling trend in which hardware manufacturers abandon Google's search engines in favor of Bing. If either of these situations materialize, we could see Google's mobile revenues take a hit.

Growth in PC search revenues

The market seems to estimate an increase in Google's revenues from its PC search business over the long term. In contrast to the market, we forecast that the increasing usage of smartphones and tablets will actually lead to a decrease in PC search revenues by 2019, when compared with the current year. We think that this will materialize because internet growth will be driven by emerging markets, where users are more likely to use the internet via a smartphone instead of a PC.

Other Services

Another aspect that the market might not be taking into account is that all of Google's services are seeing increased competition. For example, while Youtube is a market leader and an early entrant in the user-uploaded video space, it is facing increased competition from services such as Vimeo. Additionally, Google's Gmail offering could see slower growth due to Microsoft and AOL attempt to attract more users via an interface redesign. It seems that the market expects growth from these segments to outpace our estimates, a partial explanation of the difference between our price estimate and the current market price.

Conclusion

Overall, Google's long history of rapid growth could be in trouble due to the headwinds it is currently facing. The technology industry is bound to change, and the company, to its credit, knows that it will have keep innovating to stay relevant. However, we can't forecast a release of a blockbuster product which will substantially drive Google's revenues going forward, and think that the market is overestimating the long term growth prospects of the company based on its current offerings.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AAPL , AMZN , GOOG , MSFT , SSNLF

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