I am not a financial analyst, I don’t play one on TV and neither did I stay in Holiday inn express last night but I would like to ponder on the valuation of a certain business model. There is so much clamoring for a piece of the advertising pie that I decided to check out what this hoopla I all about. I am not claiming that all these #s are totally accurate. They are back of the envelope calculations at best and take it for what its worth ( close to nothing ).
WW total spend on Advertising ( online + print+ media+ hoardings + etc ) = $500 Billion
Online advertising today = ( less than ) $20 Bil
This segment is projected to grow immensely
Say in 5 years Online advertising = ( less than ) $100 Bil ( 20% of overall advertising ) – BEST case
Google market share today is about 30 % - lets say it grown in the best case to about 40% which will put their share to 40 Billion
Margins in content publishing business will reach an equilibrium of 20% - even at a high end say it is at 30% -> GOOG’s margin is 12 Bil
For arguments sake, I am going to assume that google doesn’t really get much traction on other revenue streams other than advertising ( search, placement, display etc )
Let’s take an earnings multiple of 15-20X considering the risk, potential upside outside of this core business etc -> 180- 240Bil market cap – today GOOG’s market cap was 138 – some room for growth huh?
I know that you are itching to ask me why I took an revenue multiple and not an earnings multiple- the answer is that I think the earnings ( driven largely by the margins ) are going to wildly fluctuate in the next few years before it reaches an equilibrium. Of 20%. It might even increase in the short run before it starts coming down.