) traditionally competes with Microsoft (
) Yahoo (
), and AOL (
) in the search advertising market.
Our price estimate for Google stands at $632
, which represents a 5% premium to market price. However, recent
product delays could be reason for concern as operating costs
necessary to resolve the issues increase and profit margins
correspondingly suffer. We highlight the potential impact on Google
search advertising business, as these operations contribute the
majority share (roughly 71%) of Google's estimated stock value.
Product Delays Mounting for Google
Google unveiled its Google TV product during Fall 2010 amid high
expectations. Google TV allows user to simultaneously search the
internet and television channels, download apps, and customize
their television interface. The first Google TV from Sony, which
works with Logitech's set-top box, started shipping in October,
2010. However, this service did not meet expectations and received
weak reviews from users, prompting Google to refine its software
and causing delays in integrated product introductions with popular
More recently, media companies like News Corp (
), CBS (CBS) and Viacom (VIA) have decided to block Google TV from
showing their shows for free over the internet, causing further
concerns for the product's outlook.
Google has also announced delays for a few other projects like
the Chrome OS for netbooks and Android's version for tablets.
Chrome OS will now be launched in mid-2011, after initial
expectations for launch during the second half of 2010.
The recent delays are worrying signs for Google, and could
eliminate the value premium implied by our current
$632 Trefis price estimate for Google stock
Delays Could Pressure Operating Margins
These project delays could increase Google's operating expenses
as the company invests more resources into resolving the
outstanding issues. Rising costs and delayed revenue recognition
could pressure operating margins and produce downside to Google's
We currently estimate that EBITDA margin, a measure of the
amount of top-line revenues that flow through to operating profit,
for Google's search advertising business will increase gradually
from 49% in 2009 to 53% by the end of our forecast period. The
projected increase stems from greater scale as well as
stabilization in "Traffic Acquisition Costs" (cost related to
drawing site traffic).
However, if project delays permeate Google's search advertising
operations and spark increased operating costs, our profit margin
forecasts could prove optimistic. To demonstrate the sensitivity of
the company's stock value to this metric, we estimate that flat
EBITDA margins in the search advertising segment through our
forecast period (vs. our projected 400 basis point increase) would
bring our price estimate in line with market price, implying 5%
downside to our number.
See our company breakdown and estimates for key drivers of
Google's stock value in the display above.
You can see the complete $632 Trefis Price
estimate for Google stock here