Google Could Approach Record High on Online Shopping Growth

+6.47%
Upside
152
Market
162
Trefis
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GOOG
Alphabet

The proportion of consumers doing their shopping online is rapidly expending this year. The increased eCommerce traffic does not only benefit retailers with a strong online presence like Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY), but also internet search players like Google (NASDAQ:GOOG) as greater online activity compels retailers to bid higher for search keywords and advertising space.

We believe Google could see the greatest upside from this trend among competitors like Yahoo (NASDAQ:YHOO) and Microsoft (NASDAQ:MSFT), as search ads account for over 70% of our $632 Trefis price estimate for Google stock.

Increasing Emphasis on Online Ad Presence

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According to a report from IBM (NYSE:IBM) Coremetrics, the US online retail sector delivered strong sales growth of around 19% year-over-year (YOY) on Cyber Monday 2010, with an 8% increase in average order size. [1] These encouraging growth numbers followed a 16% YOY increase in online shopping on Black Friday, with average order size up 12%. [2]

Although players like Amazon and eBay benefit directly from the increased spending, the activity has an indirect impact on Google. Online shoppers are likely to search between a variety of products and retailers before reaching a decision. A person interested in digital cameras, for example, will likely search Google to determine the best prices or highest quality of a particular model.

The corresponding growth in search volume provokes advertisers to bid up prices for targeted keywords to optimize their online presence and grab share of the expanding online shopping demographic. Increasing click through rates (the number of times a user clicks on an ad per impression) and higher cost per click (pricing) will raise Google’s recorded revenue per search.

Higher Revenue per Search Presents Upside for Google

Google’s revenue per search declined sharply in 2009 due to weak global economic conditions. We anticipate that this metric will drop further to about $15 in 2010, and reach roughly $9.5 by the end of our forecast period.

[trefis_forecast ticker=”GOOG” driver=”0573″]

However, increasing online activity could limit the downward slide in revenue per search. If eCommerce trends limit the forward downside in revenue per search to about 50% of our projected drop (to roughly $12 by the end of our forecast period vs. our current $9.5 estimate) there could be nearly 20% upside to our $632 Google price estimate. We note that our base case estimate already stands about 7% ahead of market value.

You can see the complete $632 Trefis Price estimate for Google stock here

Notes:
  1. Cyber Monday online shopping, IBM Coremetrics, November, 2010 []
  2. Black Friday  online shopping, IBM Coremetrics, November, 2010 []