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.
Click here to see our complete analysis of
Google
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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