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Google (NASDAQ:GOOG) recently relocated the Chinese version of its search site to outside of China in response to cyber attacks by Chinese hackers. According to the Wall Street Journal, Google stands to lose about $200 million a year from its decision to exit China. We estimate that this equates to a 1% search market share loss globally.

There could be a downside of 1% to the $705 Trefis price estimate for Google’s stock from Google’s decision to exit China.

Below we explain the significance of the search advertising business to Google’s stock, and why the company’s decision to exit China will not have much downside to its stock price.

Search Advertising Business 68% of Google’s Stock

We estimate that the search advertising business constitutes 68% of the $705 Trefis price estimate for Google’s stock.

Google mainly competes with Baidu (NASDAQ:BIDU) in the Chinese search advertising market. Google has about 30% share in the Chinese search market compared to 59% for Baidu. Microsoft (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO) together have about 10% market share in the Chinese market.

We believe that Google will continue to gain share in the global search advertising market from around 67% in 2010 to around 73% by the end of the Trefis forecast period.

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 “restaurants NYC” would be shown a variety of ads on the right-hand side (under the Sponsored Links column) of Google’s search results pertaining to restaurants and food services in New York City.

As a result of Google’s exit, fewer Chinese internet users are expected to search on Google resulting in a decline in revenue collected from keyword advertising from China.

1% Downside to Google’s Stock from its Exit from China

Although we forecast that Google’s search market share will increase to around 67% in 2010, there could be a downside of $7 (1%) to the $705 Trefis price estimate for Google’s stock if its market share were to increase at a slower rate than we forecast as a result of the exit from China.

By modifying the forecast for Google’s search market share above, you can see how Google’s stock would be impacted if its share were to reach 66% by the end of the Trefis forecast period instead of the 68% we forecast.

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

Disclosure: No position

Source: Google's Exit From China Won't Have Much Impact on Its Stock