Google’s shares reached the $500 mark on Tuesday, the highest point since the company went public in April 2004, when he shares were priced at $85.
Stockreply believes the shares will reach the $1,000 mark, and speculates when that mark might be reached…
How big is the world advertising market?
“Our number is $650 billion, a blend of what the largest advertising agencies and investment banks say”.
What is the internet share of this market?
“The blended guess at this point is that internet advertising is around $23 billion or 3.5%. Our assumption is that this could peak at 25%.”
What about Google’s market share?
“Google is annualizing over $10 billion in revenues right now, to give a share on our numbers of 45%. While there is a positive network effect in AdSense and Search, there are plenty of uncertainties in how ads will be delivered in the future. We have plumped for a future share of 35%, which would be unprecedented in the media markets. This is the most sensitive assumption.”
What does this do for Google’s revenues and net profits?
“The global market in internet advertising, in today’s dollars, peaks at $163 billion in this model. Google’s share is $57 billion. Their net margin is currently 30% and we let that grow to 40% … Earnings per share goes from $10 this year to $57 at peak (we are ignoring the extra couple of dollars earned on the cash pile generated).”
What is the valuation?
“If Google reaches this mighty summit – undisputed king of the best advertising medium in history – it will be at maturity valued at some twenty times earnings, we believe, like a mature monopoly newspaper or TV station ten or twenty years ago.”
“Bingo! Price per share is $1,140, easily breasting the catchy Google $1,000 slogan. The question we posed up front was when? The only time driver in this model is the size of the addressable market. Given the conservative nature of ad buys this looks like a seven to ten year migration. “
The $1,000-per-share and associated market capitalisation sounds outrageous but we’ve long held the belief that Google will become the biggest advertising network / powerhouse in history, across multiple media channels. So it figures…