Google Will Hit $1,000: The Ifs, Ands, & Buts…

by Marc Bastow | April 17, 2013 12:30 pm

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[1]Remember back in the day — OK, maybe just a year ago — when tech investors engaged in the parlor game of  “Who will get to $1,000 a share faster: Google (NASDAQ:GOOG[2]) or Apple (NADSAQ:AAPL[3])?”

It doesn’t seem like much of a discussion anymore, does it? At this point Apple is flirting with $400[4] after a drop of 42% from it’s 52-week high, while Google is now viewed as the alpha-dog stock, climbing as high as $844 a share only a month ago.

Dizzying heights indeed … but what will it take for Google to crack the magic $1,000-per-share milestone? Let’s start where we are right now: at roughly $785 a share, investors need to see a 27% rise to see $1,000 — a pretty steep move.

But it can happen…

If…

Google continues to grow its share of ‘eyeballs’ — and their advertising dollars — to its near monopoly search engine. With more than 200 million monthly visitors[5] to Google.com and another 184 million to YouTube.com, Google is far ahead of Facebook’s (NASDAQ:FB[6]) and Microsoft’s (NASDAQ:MSFT[7]) search sites in the battle for advertising dollars.

The vast majority (92%) of Google’s revenue is generated from advertising, with $46 billion of its $50 billion in revenue coming from ad revenue, and 68% of that $46 billion ($31 billion) coming from Google Inc. sites. Growth, and share price, will continue to be driven from search.

What makes Google’s search so superior? At the very least, Google’s proprietary algorithms contained within PageRank[8] provide lightning-fast results, all laid out on an uncluttered page, with advertising sections clearly marked, and many of the ads are links themselves, placed there based on the keywords on the page.

Google didn’t necessarily invent search and develop how to monetize it, but they have virtually perfected both the art and the science of both. By expanding the brand, Google will continue to bring in new visitors and drive continued revenue growth.

The YouTube platform continues to expand as an advertising giant. According to ComScore (NASDAQ:COMS[9]) YouTube served 2.2 billion video ads to 178 million viewers in the U.S., an all-time high for video ads in any one-month period. In 2012 YouTube watchers viewed over 4 billion videos each day[10]. What can that mean for revenues? RBC (NYSE:RBC[11]) analysts project YouTube can generate $4 billion in ad revenue for 2013. The business itself is currently valued north of $45 billion, according to Elliot Turner, managing director of RGA Investment Advisors — a very attractive “second-place” property in the Google universe.

And…

Androids take over the world: From phones to tablets, the Android OS is becoming a bigger and bigger player in the new mobile world. Google commands nearly 70% of the smartphone operating system market (according to recent data from Gartner Group), offering the Android system on phones through AT&T (NYSE:T[12]), Verizon (NYSE:VZ[13]) and Samsung (PINK:SSNLF[14]). With the market continuing to grow (up 38% year-over-year in the fourth quarter), Google will continue to get the opportunity to grab market share. At this point there’s no reason to think that can’t happen.

At the same time, tablet growth is quickly surpassing that of the dying PC breed. Indeed, IDC raised its forecasts for 2013 and 2016 growth to 172.4 million units and 282.7 million, an increase from 165.9 million and 261.4 million units, respectively, worth around $64 billion, with Android-based equipment anticipated to grow at a 21% compound annual growth rate for the market.

The Android system is open-source, inviting tablet and smartphone manufacturers into the big tent of products. The result is that in addition to its own Nexus line-up of tablets, Google’s Android system powers Samsung Galaxy and Amazon’s (NASDAQ:AMZN[15]) tablet offerings as well. You can be sure every other manufacturer out there (OK, perhaps not Apple) is trying to find ways to get Google’s attention, making growth here an enticing prospect.

Additional revenue streams pan out: Like Amazon, Google has its hands in every jar searching for new markets. Also like Amazon, Google is trying to make same-day delivery service work. Google’s Shopping Express  in San Francisco is in testing to deliver same-day purchases from companies including Walgreen (NYSE:WAG[16]) and Target (NYSE:TGT[17]). Estimates put the market at between $425 million and $850 million assuming up to 2% of orders placed on line on the same date as purchase. Not a game-changing number, perhaps, but incremental growth in a new market, particularly when you can EASILY afford the cost, is worth the effort.

And I can’t even talk about the possibilities that Google Glass brings to the table — the technology is just too new. But if wearables[18] take off like many industry experts believe they will, Google could enjoy a first-mover advantage — to say nothing of scale — that proves hard to overcome.

But…

Click to Enlarge Perhaps finding reasons to dump on the argument is the hardest part of the story. After all, Google is basically firing on all cylinders: top- and bottom-line growth is essentially on a steady upward curve over the past eight years as you can see in the graph[19] at right compiled by pingdom.com.

Indeed, the biggest “but” is the competition out there for every piece of Google’s existing business. Microsoft, Apple, Amazon, and Facebook all compete for the those same eyes, ears and wallets. All are tech giants in their own right, with money in the bank — in the cases of Microsoft and Apple, literally tens of billions of dollars — to spend on new products, or redesigns of older ones. None of them will go away, and eating into any portion of revenues in the Google ecosystem will hurt at least a little bit.

The Takeaway?

It’s difficult to suggest Google can’t reach the magic number. The bigger question is: When the stock reaches $1,000, will founders Sergey Brin and Larry Page split the stock so the rest of us can buy in … or will they finally institute a dividend?

But that’s for another day.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he is long MSFT, AAPL and VZ.

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