New Gmail Phone Service Could Boost Google Stock by 3%

| About: Alphabet, Inc. (GOOG)
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Google (NASDAQ:GOOG) recently launched a consumer Internet phone service for U.S. and Canadian users of Gmail, its popular e-mail platform. Calls within the U.S. and Canada are currently free. Google charges modest fees for international calls. In coming months, Google plans to extend phone service to international Gmail users and businesses.

We think the online telephony market holds significant economic potential for Google. Google stands to make money in two ways. First, Google can sell phone subscriptions in competition with the likes of Skype, which is planning an IPO this year. The new phone service could also attract more users to Gmail, which would boost Google’s ad revenues. Overall, we see a potential 3% upside to our $643 stock price estimate for Google. Our analysis follows below.

Gmail vs. Skype

Gmail currently boasts around 200 million active users, according to the Wall Street Journal. We expect the Gmail user base to reach 225 million by the end of this year and rise to around 520 million by the end of the Trefis forecast period. By contrast, Skype had 124 million active users per month as of last June, according to Techcrunch.

Gmail provides multiple services under one umbrella, including e-mail, chat, calendar and productivity applications. The latter falls under the Google Docs rubric, which includes hosted word processing, spreadsheets, presentations and data storage. With the addition of phone service, these apps give Skype users a strong incentive to migrate to Gmail.

Google could also grab users by underpricing both Skype and mainstream telecom providers like AT&T (NYSE:T), Sprint Nextel (NYSE:S) and Verizon (NYSE:VZ) in the U.S. Initially, Google will charge two cents a minute for calls to international landline numbers. Calls to international mobile numbers will be more expensive, costing 18 cents a minute for U.K. mobile numbers and six cents a minute for Indian mobile numbers.

By contrast, Skype charges 2.1 cents a minute for calls to landline and mobile numbers in the U.S. and many other countries, according to the Wall Street Journal report.

Ad revenue

In this scenario, Google could potentially attract more users to Gmail, which would boost the company’s ad revenues. However, Gmail constitutes less than 1% of the $643 Trefis price estimate for Google’s stock. We see a modest upside of 1% or less for the stock even if Gmail user growth dramatically exceeds our expectations, reaching one billion by 2016 instead of the 520 million that we currently forecast.

You can drag the trend-line in the chart above to create your own Gmail growth forecast and see how it impacts Google’s estimated share value.

Subscription revenue

Last September eBay (NASDAQ:EBAY) sold its 65% stake in Skype to a group of private investors led by Silver Lake Partners, a private equity firm headquartered in Menlo Park, CA. The deal valued Skype at $2.75 billion.

As discussed above, Gmail’s broad feature set could help it build a larger business compared to Skype. Assume for argument’s sake that Google builds a phone subscription business double the size of Skype’s. This scenario would add $5.5 billion to our $205 billion market cap forecast for Google, yielding a 2% upside to our stock price estimate.

Disclosure: No positions