Search Ads Drive 70% of Google’s Stock Value
Google’s (NASDAQ:GOOG) search business accounts for around 70% of our $603 price estimate for Google stock. This is incredible since all of Google’s other businesses together only represent 14% of our price estimate (the remaining 16% comes from cash net of debt). Google is the dominant player in the global search market, and around 68% of internet search queries are conducted through Google. Yahoo (NASDAQ:YHOO), Microsoft (NASDAQ:MSFT) and AOL (NYSE:AOL) are much smaller players in this market.
Below we examine why the search business generates so much value for Google. Our $603 price estimate for Google stock, is about 5% above market price.
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High Search Monetization
We estimate that Google’s revenue per 1,000 searches (RPS) will be around $14 in 2011. Comparatively, we project that YouTube will see a much smaller $4 in revenue per 1,000 page views (RPM). Page view monetization on Orkut and Gmail is even lower than YouTube.
High Search Volume on Google Sites
Both Google paid search and Google search on partner websites earn comparable amounts of revenue per 1,000 searches. However, Internet users conduct fewer searches on Google’s partner sites (~3.9 per month per internet user expected in 2011) compared to searches conducted on Google (~83 per month per internet user expected in 2011). Furthermore, Google only gets to keep ~14% of the revenue generated on partner websites.
High Search Margins
We estimate that Google Search Ads will have an EBITDA margin of ~50% by 2011. In comparison, Gmail and Orkut are expected to have EBITDA margins of 43% during the same period. YouTube still appears to be generating operating losses, but is expected to become profitable in the near future.