There’s been plenty of talk about whether or not Google Inc (NASDAQ:GOOG) could reach $1,000 by the year’s end. Deciphering Google’s prospects begins with an analysis of the company’s market outlook and the durability of its cash flows.
One of the first steps in any valuation is to examine the key factors driving the growth of the underlying business. There are two sides to this coin: profitability metrics and market growth potential.
Google’s undoubtedly the worldwide leader in online search. But how significant is search to the company’s business?
As shown in the chart above, Google Inc (NASDAQ:GOOG)’s network sites and its Google.com segments make up 25% and 62% of revenue, respectively. Google’s profitability, therefore, is ultimately determined by the performance of its cost-per-click, or CPC, metric. CPC simply refers to the amount an advertiser pays Google when a user clicks on an ad.
Investors have watched Google’s CPC metric take quite a rollercoaster ride over the last couple years. As the company becomes increasingly mobile, it’s had to adapt its monetization methods. The proliferation of Google’s own Android platform has, in fact, been a huge driver in global mobile adoption.
At first, this was a significant challenge for Google Inc (NASDAQ:GOOG) as it shifted its advertising to mobile platforms. The company’s year-over-year CPC comps began to decline and eventually turned negative. But Q4 2012 showed signs of a potential bottom to this decline, with CPC even trending up 2% sequentially.
The company’s market outlook reveals considerably favorable growth prospects. Namely, the digital advertising market is growing far more rapidly than other forms of advertising.
The Pew Research Center’s Annual Report on American Journalism describes this transformation:
Digital ads, which outpaced newspaper advertising for the first time in 2011, now make up 23% of overall U.S. advertising, up from 20% in 2011. They are second only to television ads in terms of overall dollars, and are growing three times faster. eMarketer projects digital’s share of the U.S. ad market will grow to 29% by 2016.
Google’s paid clicks, or the quantity of clicks on its advertisements, confirm that Google is benefiting from the trend of increasingly more digital advertising. Paid clicks were up 24% from the year-ago quarter.