Upside & Downside Scenarios to Google's $600 Value

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Google's ( GOOG ) most important division is its search ads business that constitutes over 65% of the current stock estimate. The company makes its revenues through search and display advertisements, which are made available through its own websites as well as Google Network websites. Google continues to dominate the +$60 billion online advertising industry competing against other Internet giants such as Microsoft ( MSFT ), Yahoo ( YHOO ) and AOL ( AOL ).

We have a near $600 price estimate , which is just slightly ahead of the current market price.

Here we highlight 3 of the most important drivers for Google's business and the upside as well as downside risk posed for Google's stock based on these drivers.

1. Google Search Market Share : Google's percentage share in annual worldwide Internet searches was 68.0% in 2010.

2. Google Revenue per Search : The average advertising revenue generated by Google for every 1,000 searches conducted on its sites was $15.10 in 2010.

3. Search EBITDA Profit Margin: The EBITDA margin for Google's search advertising business was 49.4% in 2010.

15% upside scenario| $690 Trefis price estimate for Google's Stock

1. Google's search market share increases (+5%):

We currently forecast Google's search market share to reach over 72% by the end of the Trefis forecast period. The projected increase is attributable to a significant rise in Android's share of the mobile OS market, technological advances such as better algorithms and Google Instant as well as Google's higher brand recognition over others. Google has provided innovative offerings such as Google Earth and Google Maps in the past and recent offerings such as Google+ have the potential to further boost the company's share in the search advertising market.

There could be an upside of 5% to our estimate for Google's stock if its search market share was to reach around 78%-79% by the end of the Trefis forecast period.

2. Improved Revenue per Search (+5%):

We currently forecast to decline to about $9.20 by the end of the Trefis forecast period. The decrease is attributed to the overall search volume shifting away from high revenue per search (RPS) categories such as technology and finance to lower RPS categories such as entertainment and consumer products. The trend is also reflective of increased Internet penetration to global audiences outside the U.S. If Google search focuses on higher monetization categories in future, we could see increased RPS values providing  upside to the estimated stock price.

There could be an upside of 5% to our estimate for Google's stock if its search ads RPS was to reach around $10 by the end of the Trefis forecast period.

3. Search EBITDA Profit Margin Rises (+5%):

Our current forecast for Google's search-related EBITDA margin stands at around 46%. The current year (2011) has seen a decline in EBITDA margins due to higher marketing and R&D expenses, However, we expect margins to revive in the long-term as traffic acquisition costs reduce and Google's promotional expenses (such as on Chrome and Google+) begin to yield returns.

There could be an upside of 5% to our estimate for Google's stock if its search EBITDA margin was to reach around 50% by the end of the Trefis forecast period.

15% downside scenario | $510 Trefis price estimate for Google's Stock

1. Declining search market share (-5%):

Google's dominant position in the web search market has forced other competitors to aggressively follow suit coming up with new product offerings as well as web partnerships to enhance their position in the market. Recent key examples are the Yahoo-Bing search alliance, as well Microsoft's web partnership with Baidu in China. Competitive threats such as these could pull down Google's market share in future.

There could be a 5% downside to our estimate for Google's stock if its search market share was to reach around 66%-67% by the end of the Trefis forecast period.

2. Reduced Revenue per Search (-5%):

Revenue per search (RPS) values can decline at a faster-than-expected rate driven by a higher international sales mix as well as increased competition in the online advertising space which can drive down cost-per-click rates. We estimate a 5% downside to our estimate for Google's stock if its search ads RPS was to reach around $8.30-$8.40 by the end of the Trefis forecast period.

3. Declining Search EBITDA Margin (-5%):

Search EBITDA margins have declined for both quarters of 2011 driven by increased marketing on the Chrome browser and Google+ as well as salary increases across-the-board. There could be a decline in expected margins if expenses incurred on these offerings do not prove fruitful in future.

We estimate a 5% downside to our estimate for Google's stock if its search EBITDA margin was to stay relatively flat at around 42% till the end of the Trefis forecast period.

See our complete analysis for Google



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 , AOL , GOOG , MSFT , YHOO

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