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Davis Meiering, Aaron Chinn, Victor Ma, and Kevin Tsao
With Khushali Upadhyay as Advisor

What is Google?

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Company Overview
“We invest the vast majority of our resources and time in … our big bets.” – Larry Page1
Business Description
World’s largest internet display ad company
with 4 key business segments:
§  Search and display advertising

Market Cap:
LTM Revenue:
LTM Net Income:

§  Android operating system platform
§  Consumer content through Google Play

Balance Sheet Items
Cash & Equivalents:
Total Cash & ST Investments:
Total Debt:

§  Enterprise, commerce, and hardware products

1-Year Share Performance

Key Financials
$373.7bn
$67.9bn
$13.1bn
$13.5bn
$60.1bn
$8.6bn

Mobile

Home Entertainment

Fiber Optics

YouTube provides video ad solutions, offers
analytic tools, and establishes key
partnerships with content companies to help
monetize mobile video.

The Nexus Player is the first living room
set-top-box to run Android TV – it’s the
answer to the Apple TV and Roku 3. It also
supports Google Cast, allowing Chromecastcompatible apps to run smoothly on it.

Google Fiber provides internet and cable TV
service using fiber optic cabling. At up to
1,000 Mbps, Google Fiber is 100x faster than
today’s basic broadband. It is expected to
be launched in 34 cities in 9 metro areas
around the United States.

Google Play is expanding its mobile presence
by introducing Play Music, Play Movies,
and Play Books to Apple’s iOS platform.

Source: Company, Wall Street Research, Capital IQ
1.  1Q13 earnings call
2.  FY2013 revenues

Investment Thesis
Growth at a Reasonable Price

§  Diversified asset base with huge growth opportunities
–  Misunderstood business model
–  Integrated platform gains value over time
–  Unexplored markets with active R&D

§  Largest user data base with significant monetization capability
across platforms
§  Significant economic moat provided by scale economies,
network effects, and large switching costs

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Agenda of Topics

Search

Ads

Consumer

Google’s platform revolves
around its superior search
engine
Massive monetization and
extreme, but reasonable pricing
power
Opportunities to expand user
base and integrate users across
the existing platform

R&D

Google always has their eyes on
the future, maintaining a
robust product pipeline

Valuation

DCF shows over 30% upside in
very reasonable growth
scenarios

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Introduction to Search
How It Works: Search

Innovations
§ 

Web Crawlers (Spiders or Google Bots) à Page
Crawling à Index à Factor Query à Result

Yahoo Vs Google

Knowledge Graph:

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Data on Google Search
Internet Usage Map

Global Market Share - Desktop

User Visits: Google/Bing/Yahoo

Global Market Share - Mobile

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Google’s Moat
Google’s Moat: Network Effects

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Google’s Moat
Google’s Moat: Product Differentiation

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Why Google Rocks and Will Always
Perceived Product Differentiation/ Network Effects
§ 
§ 
§ 

Cradle to Grave – McDonalds, Apple, Cell Phones,
Credit Cards
Alexa – 54% of sites are faster
Revenues- Advertising
- 67% Websites
- 24% Network Members websites
- 9% Other

Product Differentiation
Page Rank: Algorithm to determine page importance
Knowledge Graph:
https://www.youtube.com/watch?v=mg91_trV4hY

Huge Market Share and High Switching Costs

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Value Comes from Mobile Growth
WSJ – Mobile-Ad Spending Leaps

Business Insider: Advertising Revenue Growth

Still, the imbalance remains stark: American adults now

quarter

spend almost a
of their media time on mobile
devices, eMarketer estimates, yet this year's spending
growth will raise mobile's share of the ad market to only
9.8%. By contrast, American adults spend only 2% of
their media time reading newspapers but ad spending for
the sector hangs just under 10% of the overall market,
eMarketer estimates.

The Economist – Moving Targets

Mobile Time Growth

Advertisers are experimenting with “geofencing”, which
allows them to reach people within a particular area
Mobile devices, unlike desktop computers, are typically

one person

used by only
, which is a great help to
advertisers who want to target specific users. 

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Mobile Growth

12

Mobile Growth

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Company Overview
Advertising – Why It’s Here To Stay
§ 

§ 

Google has double-digit Y/Y growth in revenue over past few years – impressive given a
company with $60 billion annual revenue
–  Grew 32.4% in 2012, 19.2% in 2013, and is expected to be 17.2% in 2014 – we assume
12%
–  Largest potential is from mobile ads growth in gross advertising sales
–  Eroding margin and threat of declines in ad revenue are legitimate concerns but are
extreme long run issues
•  Rate of decline in average CPC actually beat analysts expectations in Q3:2014
As long as Google is the king of search engines, its advertising business is here to stay
–  Because of Google’s competitive advantages, it is has a lot of power over advertising
parties
–  Google’s ad revenues are steady and are growing – stable cash flow for Google to further
develop or pursue other projects that may be hits: optionality

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Company Overview
Advertising – Breakdown of Services
§ 

§ 

§ 

Advertising is responsible for roughly 90% of Google’s total gross revenue and is divided up into 2 categories
–  Google Websites: (68.2%) ads on Google’s search (AdWords) and other Google related sites (YouTube,
Google Maps)
–  Google Network Members’ Sites: (21.4%) – aka AdSense: ads on websites Google pays to have ads space
•  With AdSense, content provider gets 68% of the click price
Three different payment plans:
•  Cost-per-click (CPC) model – Google charges advertising party $ per click
•  Cost per-thousand-impressions model (CPI) – cost per display of ad
•  Cost per engagement model (CPE) – cost for a defined action
DoubleClick provides display advertising services for Google Websites and Network Members’ Sites
•  DoubleClick provides Interactive Ads
•  Software integrates well with AdSense

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Company Overview
AdWords – How It Works
§ 

§ 

§ 

When someone uses Google Search, an AdWords’
ad goes through the “auction” process which
determines if the ad is displayed and where it is
displayed
Google then displays the ads that have a
sufficiently high Ad Rank determined by:
–  Bid of advertising party
–  Ad quality
–  Expected impact of ad on extensions of web
browser
Extremely open and available to any advertising
party
–  Cost-per-click model is very friendly to
businesses of all sizes to advertise
–  SMBs can have higher Ad Ranks than large
corporations if they have more relevant ads
with better keywords and also ads with better
quality
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Company Overview
Advertising – Why It’s Here To Stay – Part 2
§ 

§ 

§ 

Threat of margin erosion is very long term –
market is overreacting
–  Q/Q decline for CPC in Q3:2014 was
2% - analysts expected 2.5%
–  Q/Q change in revenue for Q3:2014
was 20.1%
–  Assumption of annual revenue growth
on model is 12% for 2014 and declines
1% for every year after that until 3%
Google’s update to AdWords last year allows
advertisers to buy sponsored results across
PCs, smartphones, and tablets
–  Shift to mobile ads further contributed
to historical declines in CPC but
transition into mobile has settled
•  No reason for historic decreases
to CPC to resurface
Google has a lot of power over advertising
parties
–  RapGeniusIdiot
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Company Overview
Case Study: Rap Genius
§ 

§ 

§ 

“Yooo waddup! Here is how it works: If you have a dope post that you would like us tweet outget you MASSIVE traffic- then put this html (below) at the bottom of your post and send me
the URL along with the EXACT text you want tweeted. I will send that sh*t out and it will
bloooowwwww up!”
What happened in English:
–  Rap Genius promoted users to tweet posts of links of a new Justin Bieber album to drive
up web traffic for its website
–  Plan backfired when Google founded out about it and pushed Rap Genius behind other
websites as punishment – daily views dropped from 1.37 million to 0.49 million
–  Rap Genius comes crawling back to Google
Moral of the story:
–  Google has immense power because its search engine has a huge audience
–  SEO is another type of advertising in and of itself
•  Not everyone can be on the first page of Google’s results
•  For everyone else, there’s AdWords

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Company Overview
Risks to Google’s Online Advertising
§ 
§ 

Threat of competitors such as Microsoft’s Bing doing potential harm to Google by stealing
traffic away from Google’s search engine
No Facebook (Google+ is not a successfully endeavor)

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Consumer: Android
Android
§ 
§ 
§ 

Android Activations

Small Start-Up in Palo Alto
Original Plan: Digital Camera OS
Nearly ran out of money

Current
2013

Under Google
§ 
§ 
§ 
§ 

2012

Google acquired Android Inc. on august 17, 2005
Linux based operating software mostly focused on mobile
platforms
1 billion active users
Map

Domestic

2011
0

200

International

400

Other

Android

Other

• 

Pie graph

• 

Android vs iOS

• 

52% in US

1200

0.50%  

0.70%  

• 

78% globally

84.70%  

Android  

21

1000

11.70%  

22%
78%

Android

800

Q2 Market Share
2.50%  

48% 52%

600

iOS  

Windows  

BlackBerry  

Others  

Consumer: Play Store and Apps

Apps Make Money
• 
• 

$25 registration fee to register for Google Play on the Google Play Publisher Site, 70/30 revenue split between developer and Google
Play store revenue of $1.3 billion, Estimated to be $5.2 billion in the next 4 years

Mobile Internet Ad Revenues
2018  

Mobile Search Revenues
2013  

2016  

2012  

2014  
2011  

2012  
0.00  

22

20.00  

40.00  

60.00  

Google  

Total  

80.00  

100.00  

$0    

$2    

$4    
Google  

$6    

$8    

$10    

Consumer: Products
Nexus Phones

Nexus Tablets

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Consumer: Products
Other Products

Developing Products

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Consumer: Domestic and Foreign Marketshare
Domestic
Smartphone

Tablets

42%  

42%  
58%  

Smartphone  

58%  

No  Smartphone  

Tablet  

No  Tablet  

International
Smartphone

Tablets
6%  

20%  

80%  

Smartphone  
25

94%  

No  Smartphone  

Tablet  

No  Tablet  

Research: Google X, Google Ventures, and Acquisitions
Google X

Google Ventures and Acquisitions

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Intellectual Property
Consumer Wise

Google holds no IP rights on content held within Google Drive

Patents, Trade Secrets, Lawsuits, Oh My!

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Valuation
1 Quarter
Ending
12/31/14

Today
9/30/14

Projected Fiscal Years Ending September 30,
2015

2016

2017

2018

2019

2020

2021

2022

2023

Unlevered Free Cash Flow (UFCF)
EBITDA

$34,827.3

$38,595.5

$42,344.1

$46,021.5

$49,629.8

$52,138.4

$54,968.6

$57,721.8

$60,029.4

$61,829.4

EBIT
( – ) Taxes

$27,361.2
(12,193.7)

$30,305.7
(13,534.7)

$33,246.3
(14,872.3)

$36,329.9
(16,189.0)

$39,205.7
(17,484.6)

$41,936.7
(18,398.1)

$44,474.0
(19,424.8)

$46,687.9
(20,426.4)

$48,554.5
(21,273.9)

$50,015.3
(21,945.4)

15,167.5
3,903.7
3,562.4
(6,229.7)
494.2

16,771.0
4,308.6
3,981.2
(6,914.9)
(322.0)

18,373.9
4,698.4
4,399.3
(7,606.4)
(324.9)

20,140.9
4,921.7
4,769.9
(8,291.0)
(321.6)

21,721.1
5,262.1
5,161.9
(8,954.3)
(311.6)

23,538.7
4,676.1
5,525.6
(9,581.1)
(294.5)

25,049.2
4,643.1
5,851.6
(10,156.0)
(270.1)

26,261.6
4,886.7
6,147.2
(10,663.8)
(238.6)

27,280.7
5,081.9
6,393.0
(11,090.3)
(200.4)

28,069.9
5,230.4
6,583.7
(11,423.0)
(156.3)

$16,898.1

$17,823.9

$19,540.4

$21,219.9

$22,879.3

$23,864.8

$25,117.7

$26,393.1

$27,464.8

$28,304.7

Unlevered net income
( + ) Depreciation & Amortization
( + ) Stock Based Compensation
( – ) Capital expenditures
( – ) Change in w orking capital
Unlevered free cash flow

Assum ptions
Net debt

$

Fully diluted shares outstanding

(51,444.0)

Current Share Price

678.400

Market Cap

WACC

9.7%

Exit Multiple

10.0x

542.09
367,753.86

Sensitivity Analysis
Enterprise Value

Equity Value

Terminal EBITDA Multiple
Discount
Rate
(WACC)

##########
8.7%

8.0x

10.0x

Terminal EBITDA Multiple
12.0x

(WACC)

12.0x

8.0x

Implied Upside
10.0x

12.0x

$428,373.5

$497,860.4

8.7%

$410,330.6

$479,817.5

$549,304.4

8.7%

11.6%

30.5%

49.4%

9.7%

$358,886.6

$428,373.5

$497,860.4

9.7%

$410,330.6

$479,817.5

$549,304.4

9.7%

11.6%

30.5%

49.4%

10.7%

$346,631.6

$413,464.1

$480,296.6

10.7%

$398,075.6

$464,908.1

$531,740.6

10.7%

8.2%

26.4%

44.6%

Terminal EBITDA Multiple
8.0x
10.0x
Rate

10.0x

$358,886.6

Im plied Perpetuity Grow th Rate

Discount

8.0x

Value Per Share
12.0x

Terminal EBITDA Multiple
8.0x
10.0x

12.0x

8.7%

2.8%

4.0%

4.7%

$604.85

$707.28

$809.71

9.7%

3.8%

4.9%

5.7%

$604.85

$707.28

$809.71

10.7%

4.7%

5.9%

6.6%

$586.79

$685.30

$783.82

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