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