“Updating The Long Thesis” report, we view our core Long Thesis on GOOG as well-intact:
1) There is still solid secular growth ahead for Internet Advertising, given that at best 15% of global advertising/marketing dollars are currently online;
2) Search has been and will remain one of the most dynamic/best growth segments of Internet Advertising, and Google is the clear market share leader in this segment;
3) Google’s option value in terms of other Internet Advertising segments – Mobile, Display, Video – has now become material at over 10% of total revenue; and
4) Adjusted for cash, GOOG trades at close to a market multiple, which we view as a relatively attractive valuation for a Secular Growth leader.
Google’s Traction With Display Advertising – On its Q3 EPS call, management disclosed that Display Advertising (including primarily its Display Ad Network and YouTube) had reached a $2.5B revenue run rate. Management also indicated that it would likely not continue to provide this detail going forward. But we’ll be looking for any disclosures on continued growth for this segment. Our work – detailed in our December 20th report – suggests that Google’s Display Ad Network was likely the largest component of this $2.5B, and we project this segment could grow 20% to 40% in 2011, driven materially by market share gains. Per our March 20th note, we peg YouTube’s current gross revenue at $1.3B and we believe this could grow 25-30% in 2012. Per our March 20th report, we have seen significant monetization advancements at YouTube (81% of the top 100 videos viewed are now showing ads) as well as consistently robust unit growth.
Google’s Traction With Mobile Advertising – On its Q3 EPS call, management also disclosed that Mobile Advertising had reached a $1B revenue run rate. We believe that this is largely being driven by Mobile Search advertising and expect this segment to grow over 100% in 2011, especially given that Mobile Search queries are likely currently growing at over 200% currently. Again, Google management indicated last quarter that they wouldn’t provide a specific update on Mobile Advertising going forward, but we’ll be looking for qualitative indications of traction. Summarizing our views on Google’s 2011 growth outlook, we continue to believe that the Street’s assumption of 24% Y/Y revenue growth could be reasonable, but somewhat conservative given the likely growth range of each of Google’s key segments. We detail below the Segment Growth Sensitivity analysis we published in our December 20th report. Our conclusion is that a broad range of ’11 top-line growth ranges could include as high as a 30% growth outlook, which we don’t believe is reflected in GOOG Street estimates nor in its valuation.
Source: Stock Market Leaked Research.