Microsoft’s Deal with Yahoo Could Hurt Google’s Stock

MSFT: Microsoft logo

The 10-year internet search partnership between Microsoft (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO) will make Microsoft’s Bing a stronger search engine and could pose a serious challenge to Google (NASDAQ:GOOG), which currently leads the search market with 65% share.  Yahoo and Microsoft currently have search market shares of only 10% and 8%, respectively.

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Below we discuss how the deal can improve the Bing search engine, why we expect Bing’s search market share to increase, and Google’s stock could be impacted if Bing share gains come at the expense of Google.

Impact on Microsoft: Bing will become a better search engine

We believe that the Microsoft-Yahoo Search partnership will improve the Bing search engine by giving Microsoft access to all Yahoo searches.  The additional search queries from Yahoo will help Microsoft to improve the technology powering Bing, yielding better search results for users and increasing satisfaction with Bing as an alternative to Google search.

Bing Search Market Share to increase to 10%

Bing, which constitutes 7% of the $32 Trefis price estimate for Microsoft’s stock, has increased its market share consistently over the past few quarters.  These recent market share gains have come at the expense of Yahoo and AOL, rather than Google; however, we believe that Google will increasingly be impacted by Bing’s market share gains.

We expect Bing’s search market share to increase from 7.4% in 2009 to about 10% by the end of Trefis forecast period as a result of improvements in Bing search attracting more users.

You can modify our forecast below to see how Microsoft’s stock would be impacted if its search market share were to increase faster than we forecast.

Stagnant Search Market Share Can Hurt Google’s Stock

Search advertising generates the most revenue for Google and we estimate that Google’s search advertising business constitutes 68% of the $703 Trefis price estimate for Google’s stock. Growth of Google’s search revenue depends in part on increasing Google search market share.  The Yahoo-Microsoft deal could lead to a stronger Bing search engine that can curb increases in Google market share.

We currently expect Google Search market share to increase from 65% in 2009 to 73% by the end of Trefis forecast period.  However, you can modify our forecast above to see how Google’s stock would be impacted if its search market share were to remain stagnant rather than increase as we forecast.

For additional analysis and forecasts, here is our complete model for Google’s stock.