Google Product Delays Could Pressure Operating Margins
Google (NASDAQ:GOOG) traditionally competes with Microsoft (NASDAQ:MSFT) Yahoo (NASDAQ:YHOO), and AOL (NYSE: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
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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, [1] prompting Google to refine its software and causing delays in integrated product introductions with popular TV makers. [2]
More recently, media companies like News Corp (NASDAQ:NWS), CBS (NYSE:CBS) and Viacom (NYSE:VIA) have decided to block Google TV from showing their shows for free over the internet, causing further concerns for the product’s outlook. [3]
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. [4]
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 stock value.
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.
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