Monday, March 11, 2013

Google, Inc: Shares Could Cross $950 On Improving CPC, Youtube Trends

Shares of Google, Inc. (NASDAQ: GOOG) were up 29 percent since mid-November, indicating that investors have regained confidence on the stock as they expect continued improvement in cost-per-click (CPC) metric that the search giant reported in the fourth quarter.

If Google manages to showcase improved CPC in the upcoming quarters along with an increase in YouTube monetization, then the stock could cross $950.

Google's revenue is measured by two key metrics - paid clicks and cost-per-click (CPC). Paid clicks represent the traffic for a sponsored link while CPC is the amount that an advertiser pays Google each time a paid click occurs.

Investors and Wall Street alike focus heavily on CPC because Google's revenue is directly impacted by this metric. More than that, it shows the appetite of an advertiser to put ads on Google. If Google's CPC is declining, it suggests that advertisers are cutting their budgets since Google is an indispensable part of the industry.

CPC's declined less than in previous quarters, dropping 6 percent in the fourth quarter. One key factor here was the implementation of more Ads Quality changes during the December Quarter. This time the changes were focused on reducing click arbitrage. The broader point is that Google has consistently resorted to Ads Quality changes to improve the Search user experience.

"Based on our channel checks into the impact of Product Listing Ads and Enhanced Campaigns, we think that Google's overall CPC trends will likely continue to improve in 2013," RBC Capital Markets analyst Mark Mahaney said in a client note.

Meanwhile, the markets are under-valuing YouTube, which is set to benefit from TV Ad budgets probable migration to online. Google's top 25 advertisers are spending an average of more than $150 million each per year, and those are quite significant numbers.

Google reported that the top 100 YouTube advertisers increased their spend by 50 percent in 2012, due in no small part to the popularity of the TrueView ad format, which accounted for 70 percent of in-stream ads.

TrueView formats only charges the advertiser if the user does not skip past the ad. YouTube viewers watched more than 4 billion hours per month in 2012 while YouTube partner revenue has doubled for the fourth consecutive year.

"We believe that YouTube is on track to generate well over $4B in '13 Revenue," Mahaney noted.

Moreover, Google benefits from its improving international market trends. Several Internet stocks will likely benefit from "less worse" trends in Europe and Emerging Markets. Google is one of them.

Google generated cash from operating activities of $4.67 billion, which, after adjusting for $1.02 billion of capital expenditures, translates into free cash flow of $3.65 billion. Google ended the quarter with $48.1 billion in cash, cash equivalents, and marketable securities on the balance sheet.

All these fundamental improvements could reflect in its valuation. Google shares currently trade 18.3 times its 2013 consensus earnings estimate of $45.59 a share.

Assuming a similar 18 times PE on its 2014 earnings estimate of $53.51, the stock price could surpass $950 ($963 to be precise) while the mean target stands at $860.10. This multiple is justified given Google's potential for a 17 percent EPS growth between 2013 and 2015. The $963 target price represents 15 percent upside from the current levels.

"We view this as a significant opportunity for GOOG Shareholders. We actually believe that GOOG shares carry the steepest discount among Large Cap Net stocks for perceived management indifference to the Street. Wouldn't take too much to remove that discount," Mahaney noted.

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