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Investment Overview for Google (NASDAQ:GOOG)
Below are key drivers of Google's value that present opportunities for upside or downside to the current Trefis price estimate for Google:
Google Search Ads
- Google Search Market Share: Google's global PC search market share has stayed at dominant levels, from 65% in 2007 to around 66% in 2012. At the same time, Google has remained virtually monopolistic in the mobile search market, with an estimated market share of 97%. However, Microsoft has started to take aggressive measures to take share from Google. It partnered with Yahoo and Facebook in 2010 to expand Bing market share. Google also faces a potential threat from Apple's Siri, which has enjoyed immense favor with users of iPhone 4S. There could be a downside of 10% to the Trefis price estimate if Google's PC market share declines to levels of 57%-58% and its mobile search market share declines to around 80%. On the other hand, if Google continues to bring innovation like Google Instant, it could continue to gain market share. There could be an upside of 10% to the Trefis price estimate if its PC and mobile market shares increase to 90% and 100% respectively by the end of Trefis forecast period.
- Google PC Search EBITDA Margin: We currently forecast Google's PC Search EBITDA margin to decrease from about 52% in 2012 to about 41% by the end of the Trefis forecast period. Historically, Google's main operating cost component has been traffic acquisition costs. We think that if Google can further can limit the growth rate of TAC and employee compensation relative to revenues its margins can stabilize and even improve to historical levels. There could be an upside of 10% to the Trefis price estimate for Google if Google's PC Search EBITDA margin were to remain flat at 52% over the forecast period instead of declining to 41% as we currently forecast.
For additional details, select a driver above or select a division from the interactive Trefis split for Google at the top of the page.
Google.com and Google's international sites (e.g. Google.ru, Google.com.br, and others) offer a dedicated platform to conduct searches on the Internet through PCs and wireless devices.
Google makes money from contextual advertising known as keyword advertising that is shown based on the type of search a user conducts. For example, a user searching for "NYC restaurants" would be shown a variety of ads on the right-hand side of Google's search results pertaining to restaurants and food services in New York City.
Advertisers on Google bid for keywords (such as "NYC restaurants ") to display their advertisements on the Google search page. Google AdWords allows these advertisers to display advertisements in Google's search results and the Google Content Network through either a cost-per-click or cost-per-view scheme. The pricing of keywords, the inventory of keywords available, and the frequency of user search, impact how much money Google makes on search.
In addition to advertising on its search engine, Google makes money by placing advertisements on other Google-owned properties such as video sharing site YouTube, social networking site Orkut, email service Google Mail (Gmail), etc. Google also makes money by facilitating the placement of advertising on its "partner" websites (via ad serving application AdSense) from which it receives a share of the advertising revenue.
Google search on mobile is increasingly gaining importance as more and more users are shifting towards mobile devices like smartphones and tablets for web browsing. According to our estimates derived from publicly available sources, tablets and smartphones are expected to surpass PC's in use globally by around 2015. As a result, mobile search would increasingly gain importance for Google, rivaling its PC-based search in contributing towards Google's stock.
We believe Google Search Ads is much more valuable than Ad Partnerships for Search & Content, YouTube, Gmail, Orkut and other divisions due to the following reasons:
Google Dominates Web Search on a Global Scale
Google's flagship search business continues to dominate globally. Competitors like Yahoo, Microsoft and AOL have been consistently pushed back as Google retains market shares of around 66% and 97% in PC and mobile devices respectively. The company's superior algorithms and brand recognition have clearly found favor with users, and till date the search engine market has not boasted of a better search tool. Given the current trends, Google's dominance is expected to continue, although one cannot discount future technologies such as Apple's Siri as possible future threats.
Growing Internet Searches per PC in Use
As web penetration increases across emerging markets like India, users are expected to increasingly become more familiar and comfortable with using web search as the flagship tool to look for information. In addition to this, web browser development has increasingly made it easier to promptly do a web search. For example, Google Chrome obviates the need to actually open the Google homepage to do a search. These above factors should contribute significantly in growing web searches for every PC device globally.
Smartphone and Tablet Usage on the Rise
The mobile revolution would have a big role to play in the way Google search is utilized. Smartphone and tablet capabilities are improving by leaps and bounds. This includes personal usage like finding restaurants and utilizing maps and GPS (Global Positioning System), as well as professional uses such as sending/receiving e-mails and making presentations. As bandwidths increase in emerging markets, mobile device functionality is expected to come at par with PC's in the next 4-5 years. This should lead to a substantial increase in the number of mobile devices in use globally.
High Search Monetization on Mobile
We estimate Google's revenue per 1,000 searches (RPS) on mobile devices to be around $7 in 2012 and expected to reach close to $10 going forward. Advertisers are increasingly recognizing that users spend a lot of time on their smartphones/tablets, with activities including music, watching videos and social networking. As a result, monetization of search on mobile devices should increase, closing in on RPS levels for PC-searches.
Growing Mobile Search
We expect increasing adoption of Internet search capable mobile phones, higher mobile Internet speeds, and increasing partnerships between search engines and mobile phone manufacturers (for e.g. think Google search on iPhone). According to a report by RBC Capital Markets, global mobile searches were around 20% of total searches in 2012. Google's open source mobile OS, the Android, should greatly benefit from this, as it uses Google search as the default search option. The Android also has the advantage of being used by multiple manufacturers, including Samsung and HTC.
Increasing Video Advertising
In contrast to search, which is more functional and commercial in nature, online video and social networking are more entertainment-focused, where ads are generally seen as a distraction. Currently, ads displayed on such platforms are graphical and static in nature, which do not drive the same recall as a moving video (e.g. television ads). As YouTube and other video sharing sites figure out better ways of displaying ads which are not intrusive and do not interfere much with the user experience (like Revision3's in-video interactive clickable ads), advertisers will be willing to pay more for such ads, driving up overall video advertising monetization.
Patent Lawsuits Threaten Android
Lately, Google and its Android-OEM partners like Samsung have been plagued by patent infringement lawsuits from arch rivals like Apple and Microsoft. In some regions like Germany, Apple has successfully ensured that certain Android-powered devices are banned from imports. On the other end, Microsoft has made sure that it extracts a licensing fee from every Samsung Galaxy S-II smartphone that is sold. Given the cut-throat competition that prevails in the smartphone and tablet sector, patent wars are expected to rage on in the coming years as well, threatening Android's market share in the mobile OS market. For now, Google has tried to build its own patent moat by acquiring Motorola Mobility in August 2011, raising its patent portfolio from less than 1,000 to over 17,000.
Voice-enabled search can threaten traditional search
Apple's voice-enabled search tool Siri has found a lot of favor with users, as it provides an even simpler and hands-free approach towards web search. While still not a credible threat, Siri could be paving the way for voice-enabled search becoming the norm, and Google might need to follow suit with its own version.
NOTE: Google announced its $12.5 billion acquisition of Motorola Mobility on 15th August 2011. The acquisition has now received regulatory approval, and we have updated our model by placing Motorola Mobility as a separate operating division within Google.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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