Decline in Search Margins, Slower Internet Growth Could Pull Google’s Stock Down by 13%

| About: Alphabet Inc. (GOOG)

Google (NASDAQ:GOOG) competes with Yahoo (NASDAQ:YHOO), AOL (NYSE:AOL), and Microsoft (NASDAQ:MSFT) in the search advertising market. We currently have a Trefis price estimate of $683 for Google’s stock, about 41% above the current market price of $483.

Trefis members have created forecasts for two key drivers of Google’s stock over the last week: (1) Search EBITDA Profit Margin and (2) Global Internet Users. The members’ forecasts suggest that Google’s Search EBITDA Profit Margin and Global Internet Users will trend below the Trefis forecast. These projections suggest a combined downside of around 13% for Google’s stock.

We estimate Search Ads to constitute around 72% of the $683 Trefis price estimate for Google’s stock. Hence the stock is very sensitive to (1) Search EBITDA Profit Margin and (2) Global Internet Users. Below are charts showing recent estimates created by Trefis members for the two drivers in detail.

1. Search EBITDA Profit Margin

The average of forecasts for Search EBITDA Profit Margin created by Trefis members indicated a projected decrease from 55% in 2010 to around 50% by the end of the Trefis forecast period, compared to the flat baseline Trefis estimate of around 58.5% over the Trefis forecast period. The member estimates imply a downside of 10% to the Trefis price estimate for Google’s stock. In the past, Search EBITDA Profit Margin has decreased from around 67% in 2003 to 59.5% in 2009.

You can drag the forecast trend-line above to express your own view, and see the sensitivity of Google’s stock to Search EBITDA Profit Margin.

Our complete analysis for Search EBITDA Profit Margin is here.

2. Global Internet Users

The average of forecasts for Global Internet Users created by Trefis members indicated a projected increase from 1.7 billion in 2010 to 1.9 billion by the end of the Trefis forecast period, compared to the baseline Trefis estimate of an increase from 1.75 billion in 2010 to around 2 billion by the end of the Trefis forecast period. The member estimates imply a downside of 3% to the Trefis price estimate for Google’s stock. In the past, Global Internet Users has increased from close to 660 million in 2003 to 1.67 billion in 2009.

You can drag the forecast trend-line above to express your own view, and see the sensitivity of Google’s stock to Global Internet Users.

Disclosure: No positions