What is the Downside To Alphabet’s Stock If Google Fails To Improve Its Share in Online Ads Market?

+6.07%
Upside
152
Market
162
Trefis
GOOG: Alphabet logo
GOOG
Alphabet

Alphabet Inc.’s subsidiary Google (NASDAQ:GOOG) has an estimated market share of 34% in the global online advertising market in 2015, according to our calculations.

Google's Share

Based on the reports from eMarketer,  the total ad industry is expected to grow to $674 billion in 2020:

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Global Ad spending

Currently, we project that online ads industry spending would grow to $275 at a CAGR of 12.1%. We also project that Google’s ads revenue would grow to $116 billion due to growth in search queries and improvement in revenue per (1000) searches. This translates into 42% share for Google in the online ad industry.

Google 2020 and Global

However, if Google’s share in online ads were to decline to 30% then it will suffer a cash flow loss of $16 billion in 2020. The ensuing loss in cashflow for subsequent years of projection amounts to $45 billion. This would lead to a loss of $42 billion in valuation (based on net present value of loss) based on a discount rate of 7%, which we estimate is the weighted average cost of capital (WACC) for the company. As a result, Alphabet’s share price can decline by $61 per share or over 8%.

Loss in Cashflow and Valuation

Footnotes

Have more questions about Alphabet? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Alphabet