Google's (NASDAQ:GOOG) stock has seen a strong run over the past year, as it has risen 30% from $600 in February 2012 to approximately $800 at present. We think that the rise in Google's stock was caused by a change in investor sentiment regarding Google's mobile monetization capabilities. The company has shown that it can successfully monetize its mobile user base as it has increased annual mobile run-rate to approximately $8 billion in Q3 2012 vs. $2.5 billion in 2011. In addition to the improvement in mobile monetization, Google's international growth (54% of revenues were generated outside the United States in Q4 2012) has investors excited because its exposure to growing markets will ensure that it can grow its revenues going forward.
Improving Mobile Prospects Key to Rise
According to our estimates, Google's mobile search ads division is its second largest division and makes up approximately 32% of its total value. This division's valuation is only marginally behind the PC search business, which makes up around 33% of Google's total value.
As stated above, we think that Google's mobile monetization has been the key factor in the rise of its stock. According to our estimates, the company's mobile revenues more than doubled in 2012 to around $5.2 billion from around $2.5 billion in 2011. Another key factor in improving investor sentiment is the fact that the recent declines average cost-per-click (CPC) seem to be slowing, and overall CPC could be stabilizing.
As can be seen from the chart above, Google's year-over-year CPC declines hit a trough in Q2 2012, and have since improved to -6% in Q4 2012. As mobile ad spending increases to $11 billion in 2013 and $25 billion in 2016, according to Gartner, overall CPCs could stabilize or grow in the future.
Android Market Share Ensure Mobile User Base
The dominance of the Android OS is another key factor in Google's 30% rise. Investors view Android's dominance in the smartphone market as a key metric because it ensures that Google retains a large share of the mobile search market. A user with an Android phone will always be more likely to use Google search when compared to a user using another OS. This is especially relevant when competing OS's such as Windows Phone use their own search engines on the mobile devices. Android held 69.7% market share in Q4 2012, and this growth in Android users will contribute Google's mobile revenue growth over the long term.
Another reason that investors are excited about Google's stock is the fact that more than 50% of its revenues are generated from markets outside the United States. This means that Google's revenues have ample exposure to Asia, Africa, and Latin America -- all of which are expected to grow at an accelerated pace over the next few years.
We think that Android's dominance in the smartphone industry will be a key factor in growing international revenues going forward. A material portion of Asia's internet page views come from mobile phones (the proportion of mobile phone page views vs. PC page views grew to 18% in 2012 vs. 8.3% in 2011), and Android's dominance internationally will ensure that it will capture growth in these markets.
We currently have a $737 price estimate for Google, which is approximately 10% below the current market price.
Disclosure: No positions.