During the past six months, shares of Best Ideas Newsletter portfolio holding Google (click ticker for report: ) have performed exceptionally well, increasing over 40% compared to a 22% gain for the NASDAQ over the same time period. Given the tremendous fundamentals of Google’s core search business, continued mobile monetization, and a stable of potentially blockbuster products, we continue to believe shares have upside north of $1,000 per share.
The main driver of our fair value estimate remains Google’s advertising business. The core search business saw paid clicks rise 20% year-over-year during the most recent quarter, driving Google Site Revenue 18% higher to $8.6 billion. Demand for online advertising shows no signs of slowing, but perhaps more importantly, Google has successfully navigated the shift to mobile thanks to both large Android adoption and strong brand recognition on other operating systems (think iOS). At least in the US, we see little competition on either the desktop or mobile space, though perhaps further integration of Siri on the next iteration of the iPhone (click ticker for report: ) could take some market share. Nevertheless, Google’s competitive position looks as strong as ever, especially as its Chrome browser recently eclipsed 750 million users.
Another incremental positive could be charging for subscriber channels on YouTube. People watch a lot of content on YouTube—approximately 6 billion hours monthly—and we suspect the company will find plenty of users that will pay for content. Currently, the channels cost just $0.99/month per channel and could be an attractive proposition to the growing number of “cord clippers” in younger generations. Perhaps YouTube could become a content hub more akin to cable companies in the future.
Without question, search and display advertising remains Google’s best business and primary source of free cash flow. Although we like the existing business, additional upside could lie in Google’s product pipeline. Not everything will be a hit; in fact, Google+ is hardly the Facebook (click ticker for report: ) competitor some had imagined. We’re actually comfortable with Google creating products and services that flop as long as the company keeps trying. Gmail is among the dominant email services, but it started out as just a bolt-on addition to the core search. We’re keeping a positive, open mind on its future efforts at innovation.
Currently, the firm is adding a product that allows payments to be sent through Gmail, which could take a small amount of share from eBay’s PayPal (click ticker for report: ) in payment transfers, but we doubt it will be a game changer. We’re still huge fans of eBay. Google also announced the launch of a $9.99/month “All Access” music service to compete with the likes of Pandora (click ticker for report: ) and Spotify. Again, this might not be a game changer, but it could be just enough to weaken competitors and help the company gain share through its established base of Android users.
Still, these possible developments might not come close to living up to the potential of self-driving cars or Google Glass. Met with significant skepticism, we believe self-driving cars could eventually become a staple in the US as companies look for additional ways to boost productivity. Not only would this usher in a new cultural phenomenon, but it would likely usher in a huge revenue source for Google.
As for Google Glass, we remain optimistic about its uses across several professional fields, though we are skeptical if it will ever become a serious threat or compliment to the smartphone (given its current price and appearance). Even if it is relegated to the professional world, Google Glass could become another enormous source of revenue.
Ultimately, we still love Google’s core businesses and the company’s potential not only to expand into new markets but to create new markets. In this sense, Google reminds us of Apple, another one of our favorite companies during the last few years. While we’re not jumping to put fresh money to work in Google at this time (we added the firm to our Best Ideas portfolio in October 2012), we believe further upside exists.