This article attempts to predict Google's (NASDAQ:GOOG) overall 2014 revenues based on estimates of total worldwide spending on digital advertising and Google's share of this market. While the methodology is rough, the resulting number is in line with Google's ad revenue growth trend of the past few years.
Google was incorporated in 1998, taken public in 2004, and generated $59.8 billion of revenue in 2013. 2013 Google 10-K (hereafter "10-K"). Thus, the company has already undergone viral revenue growth. Normally, this type of past growth would be a decided negative from an investment standpoint when assessing the rate of future growth. Nature and markets tend to revert to the mean. But Google's story is so good and its growth seemingly still so strong, that it is worth considering whether this growth is in the early, middle, or late innings.
The interesting thing about evaluating Google's revenue growth is that nearly all of Google's revenue has come from its advertising business. According to Google's 10-K, 85% of its 2013 revenues came from advertising (10-K, p. 27), which includes ads for both its search and YouTube businesses, as well as ads placed on Google member sites. The dominant role of advertising in Google's sales does, however, provide some basis for making a rough prediction about the company's overall revenues for 2014.
The premise of this prediction is that Google's advertising revenues are limited by total worldwide spending on digital advertising, i.e. the overall size of the ad market in which Google competes. Thus, the starting point for analysis is to determine how much money is spent yearly on digital advertising worldwide (including desktop and mobile device ads). There have been two recent studies on worldwide digital ad spending by seemingly reputable sources. The first study, by eMarketer, concludes that roughly $118 billion was spent in 2013. (eMarketer Study, p. 3). The second study, by ZenithOptimedia, yielded $101 billion for 2013. (ZenithOptimedia Study, p. 6). The publicly available versions of these studies do not discuss methodology or provide sources, so let me be clear that I have no independent means of assessing their accuracy.
I have chosen to use the eMarketer study because it also provides ad spending figures for 2011 and 2012, while the ZenithOptimedia study (publicly available version which is an executive summary) does not. As discussed below, the 2011 and 2012 figures are useful in more accurately determining Google's worldwide digital ad market share.
With $50.5 billion in digital advertising revenue in 2013 (10-K, p. 27), Google appears to have about 43% of the $118 billion worldwide digital ad market. Interestingly, this percentage has remained somewhat consistent since 2011, as shown by the data below.
Total World Digital Ad Spending: $87.3 billion
Google Ad Revenue: $36.5 billion
Google's Percentage of World Ad Spending: 42%
Total World Digital Ad Spending: $102.8 billion
Google Ad Revenue: $43.7 billion
Google's Percentage of World Ad Spending: 43%
Sources: eMarketer Study, p. 3; Google 2013 10-K.
eMarketer predicts that worldwide digital ad spending for 2014 will be roughly $135 billion. (eMarketer Study, p.3). If Google's market share remains consistent, then we might expect 2014 Google ad revenues to be 43% of this, or $58 billion. This number is obviously the product of a rough methodology but it does produce a figure that is in line with what appears to be a slight slowing in Google's rate of ad revenue growth since 2011.
To arrive at a total revenue figure for Google, the next step is to adjust the $58 billion figure by adding Google's "other revenues" category, which Google includes with advertising in its "Google segment" as a separate line item from advertising revenues. (10K, p. 27). The "other" category includes sales of apps, music, movies, hardware, and directly-sold Nexus products and Chrome OS devices. (10-K, p. 29). This category produced $5 billion in revenue in 2013, up from $2.4 billion in 2012 and $1.4 billion in 2011. (10-K, p. 27). The growth rate of the "other revenues" category presents a predictive problem, as it has been increasing rapidly. Assigning it a 50% growth rate seems reasonable, however, and yields an "other revenues" figure of $7.5 billion for 2014. Thus, total "Google segment" revenues for 2014 would be $65.5 billion.
Assuming that the "Google segment" makes up 93% of Google's total revenues in 2014, as it did in 2013, yields a total revenue figure of $70.4 billion for Google in 2014. A final caveat is that 93% may be a low figure due to the sale of Google's other 2013 revenue source, Motorola Mobility, to Lenovo.
Disclosure: I am long GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.