Google (GOOG)
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POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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 mobile Search Market Share: Google also continues to lead the mobile search market with an estimated market share of 85% in 2015. However, as the company improves its inapp search with deep links, Google revenues from mobile search will improve. There could be a downside of 10% to the Trefis price estimate if Google's mobile search market share declines to around 65%. On the other hand, if Google continues to bring innovation such as enhanced campaigns that bundles mobile search with desktop search and in-app search with deep links, it could continue to gain market share. There could be an upside of 10% to the Trefis price estimate if its mobile market shares increase to 95% by the end of Trefis forecast period.

  • Google Desktop Search Market Share: Google's global PC search market share has stayed at dominant levels, from 66% in 2011 to around 62% in 2015.However, Microsoft has been able to gain some market share over the past few years due to its partnership with Yahoo and Facebook in 2010. While this might impact the number of searches on Google, we expect that Google's share will improve given that it is the most recognized search engine in emerging markets, where internet is fast gaining a foothold. We expect its share to increase to 63% in the ensuing period. There could be a downside of 10% to the Trefis price estimate if Google's PC market share declines to levels of 50% and its mobile search market share declines to around 75%. On the other hand, if Google continues to expand its reach, through increased internet penetration and new search products, 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 75% by the end of Trefis forecast period.

  • Google Search EBITDA Margin for desktop and mobile: We currently forecast Google's PC Search EBITDA margin to decrease from about 46.6% in 2015 to about 44.6% by the end of the Trefis forecast period. Historically, Google's main operating cost component has been traffic acquisition costs (TAC). We believe that if Google 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 improve to 55% over the forecast period. However, if its margins were to decline to 35% over the forecast period, our price estimate could decline by 10%.

For additional details, select a driver above or select a division from the interactive Trefis split for Google at the top of the page.

BUSINESS SUMMARY

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, email service Google Mail (Gmail), etc. Google also makes money by facilitating the placement of advertising on its "partner" websites (via ad serving platform 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 desktop based web browsing. According to our estimates, derived from publicly available sources, tablets and smartphones surpassed PC's in use globally in 2014. As a result, mobile search is increasingly gaining importance for Google, rivaling its PC-based search in contributing towards Google's stock.

SOURCES OF VALUE

We believe Google Search Ads is much more valuable than Ad Partnerships for Search & Content, YouTube, Gmail 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 and Microsoft have been consistently pushed back as Google retains market shares of around 63% and 85% 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 PCs in the coming 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 $12.9 in 2015 and expected it to decline 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. However, the effectiveness of search on mobile has been in question. As a result, monetization of search on mobile devices should decrease, inline with the RPS levels for PC-searches.

KEY TRENDS

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 eMarketer, global mobile ad spending is expected to grow to $101 billion in 2016, an increase of 30% over 2015 numbers. 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, LG HTC and most of the Chinese vendors.

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, advertisers will be willing to pay more for such ads, driving up overall video advertising monetization.

Patent Lawsuits Threaten Android

Google and its Android-OEM partners like Samsung continue be 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 acquired Nokia's phone unit in 2014 to ensure that its Windows Phone platform continues to survive in the smartphone industry.However, Microsoft gave up this strategy and started offering Windows 10 for free in 2015 to enure the adoption of its OS. 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 continues to have its own patent moat by through Motorola's patent portfolio that it continues to hold onto.

In-App search Can Be A Challenge

With the advent of smartphone, application development has taken center stage. Most smartphone users now use specific apps to search for products and services. For example, users tend to use Amazon's app to search for products they want to buy, and Yelp's app to search for services (Resturant, Taxi's etc). As a result, Google's search engine is circumvented completely. This can lead to loss in revenues and market share for the company. However, to get around this issue, Google introduced deep links that surfaces information stored in apps. This has helped the company to counter the affects of in-app search, and the mobile revenues for the company have improved.

Threat from AD-Block Software

Penetration of Adblock software, which restricts websites from displaying ads on websites, is increasing. There are 198 million active adblock users around the world. This number is expected to cost publishers nearly $22 billion during 2015. This trend is especially detrimental to Google's business as the company heavily relies on Ads for its revenues.

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