Google (NASDAQ:GOOG) has announced that will it acquire Sparrow, a small startup whose only product is a mail client for Apple’s iOS and Mac OSX platforms. The amount paid for the acquisition has not yet been confirmed, but some sources say that the purchase price was just under $25 million.  Google’s Gmail service primarily competes with other online email services such as Yahoo‘s (NASDAQ: YHOO) Yahoo! Mail and Microsoft‘s (NASDAQ: MSFT) Hotmail.
From the small acquisition price and the virtually non-existent impact that the Sparrow client would have on Google’s value, it seems that the motivating factor behind the purchase was to acquire talent. The founders of Sparrow will now focus on new projects within the Gmail team, and since their expertise is in creating intuitive and beautiful interfaces, the new team will likely work on doing the same for Gmail’s web and mobile interfaces.
Despite the exciting prospects of this acquisition for Gmail users, the acquisition is not expected to increase Google’s value by a material amount. According to our estimates, Gmail represents only 1.34% of Google’s total value and, even if the company is able to increase its user base with a better product, the value of the firm will not increase substantially.
Currently, we forecast that Gmail’s user base will grow to 893 million by the end of our forecast period, and if this number were to increase to 1.2 billion, the value of Google’s stock is expected to only increase by $3. By tweaking the chart below, you can determine the impact of different user base growth scenarios on Google’s stock price.
Additionally, it is important to note if extraordinary changes are made to Gmail’s mobile interface, it could decrease the number of users who visit the Gmail web interface to view their email. If this is the case, overall ad revenues from Gmail could decrease since monetizing a mobile email platform would prove difficult.
We currently have a $681 price estimate for Google, which is currently 10% above the market price.Notes: