Davis Meiering, Aaron Chinn, Victor Ma, and Kevin Tsao Tsao With Khushali Upadhyay Upadhyay as Advisor
What is Google?
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Company Overview “We “We invest the vast vast majority of our resources and time in … our big bets.” – Larry Lar ry Page1 Business Description
Market Cap: LTM Revenue: LTM Net Income:
World’s World’s largest internet display ad company with 4 key business segments: ! !
Search and display advertising
Balance Sheet Items Cash & Equivalents: Equivalents: Total Total Cash & ST Investments: Investments: Total Total Debt:
Android operating system platform
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Consumer content through Google Play
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Enterprise, commerce, and hardware products
Mobile YouTube YouTube provides provides video ad solutions, offers analytic tools, and establishes key partnerships with content companies to help monetize mobile video.
1-Year 1-Y ear Share Performance
Key Financials $373.7bn $67.9bn $13.1bn $13.5bn $60.1bn $8.6bn
Home Entertainment 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 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
Fiber Optics 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.
Investment Investment Thesis T hesis Growth at a Reasonable Price
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Diversified asset base with huge growth opportunities –
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Misunderstood business model Integrated platform gains value over time Unexplored markets with active R&D
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Largest user data base with significant monetization capability across platforms
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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 Google’s platform platfor m 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 V aluation
DCF shows over 30% upside in upside in very reasonable growth scenarios
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Introduction to Search How It Works: Search
Innovations !
Web Web Crawlers (Spiders or Google Bots) " Page Crawling " Index " Factor Query " Result
Yahoo 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 Rocks and Will Always Always Perceived Product Differentiation/ Network Effects ! ! !
Cradle to Grave – McDonalds, Apple, Cell Phones, Credit Cards Alexa – 54% of sites are faster RevenuesRevenues- Advertising
Product Differentiation Page Rank: Algorithm to determine page importance Knowledge Graph: https://www.youtube.com/watch?v=mg91_trV4hY
- 67% Websites - 24% Network Members websites - 9% Other
Huge Market Share and High Switching Costs
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Value Value Comes from Mobile Growth WSJ – Mobile-Ad Mobile-Ad Spending Leaps Leaps
Business Insider: Advertising Adver tising Revenue Growth
Still, the imbalance remains stark: American adults now spend almost a quarter of 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 only 2% of their media time reading newspapers but ad spending for the sector hangs just under 10% of the overall market, market, eMarketer estimates.
The Economist – Moving Moving Targets Targets
Mobile Time Growth
Advertisers are experimenting with “geofencing”, which which allows them to reach people within a particular area Mobile devices, unlike desktop computers, are typically
person person , which is a great help to used by only one advertisers who want to target specific users.
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Mobile Growth
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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 –
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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 g rowth in gross advertising sales Eroding margin and threat of declines in ad revenue revenue are legitimate concerns but are extreme long run issues
Rate of decline in average CPC actually beat analysts expectations expectations in Q3:2014 As long as Google Google is the king king of search engines, engines, its its advertising business business is here to stay Because of Google’s Google’s competitive advantages, advantages, it is has a lot of power power over advertising parties •
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Google’s Google’s ad revenues are steady and are growing – stable cash flow f low for Google to further fur ther develop or pursue other projects that may be hits: optionality
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Company Overview Advertising – Breakdown of Ser Services vices !
Advertising is responsible for roughly 90% of Google’s Google’s total gross revenue and is divided up into 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 content provider gets 68% of the click price Three different payment plans: plans: Cost-per-click Cost-per-click (CPC) model – Google charges advertising party par ty $ per click Cost per-thousand-impressions 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 AdW ords – How It Works Works !
When someone uses Google Search, Search, an AdWords’ AdWords’ ad goes through the “auction” process which determines if the ad is displayed displayed and where it is displayed
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Google then displays the ads that have a sufficiently high Ad Rank determined by: Bid of advertising party Ad quality Expected impact impact of ad on extensions extensions of of web browser –
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Extremely open and available to any advertising party Cost-per-click Cost-per-click model is very friendly to businesses of all sizes to advertise advertise –
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SMBs can have higher Ad Ranks than large corporations if they have more more relevant ads with better keywords keywords and and also ads with better quality 16
Company Overview Advertising – Why It’s Here To Stay – Part 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 of annual revenue 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 fur ther 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 over advertising parties RapGeniusIdiot –
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Company Overview Case Study: Rap Genius !
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“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 in English: Rap Genius promoted users to tweet tweet posts of links of a new Justin Bieber 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 as punishment – daily views dropped from 1.37 million million to 0.49 million million –
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Rap Genius comes crawling back to Google Moral of of the story: story: Google has immense power because its search engine has a huge audience SEO is anothe anotherr type of advertisi advertising ng in and of itself itself Not everyone can be on the first page of Google’s 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 such as Microsoft’s Microsoft’s Bing doing potential potential harm to Google by 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
2011
1 billion active users Map
Domestic
0
200
International
400
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78% Other
Android
1200
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Pie graph Android vs iOS
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52% in US
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78% globally
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Android
800
Q2 Market Share )$*&'
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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
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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
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Research: Google X, Google Ventures, and Acquisitions Google X
Google Ventures Ventures and Acquisitions
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Intellectual Property Consumer Wise
Google holds no IP rights on content held within Google Drive
Patents, Trade Trade Secrets, Lawsuits, Oh My!
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Valuation Valuation Today
1 Quarter Ending
9/30/14
12/31/14
2015
2016
2017
EBITDA
$ 34 34 ,8 ,82 7. 7.3
$3 8, 8,59 5. 5.5
$42 ,3 ,34 4. 4.1
$4 6, 6,0 21 21.5
EBIT ( – ) Tax es
$ 27 27 ,3 ,36 1. 1.2 (12,193.7)
$3 0, 0,30 5. 5.7 (1 ( 13,534.7)
$ 33 33 ,2 ,24 6. 6.3 (14,872.3)
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)
$16,898.1
$17,823.9
Pr oje cte d Fis cal Ye ar s Ending Se pte m be r 30, 2018
2019
2020
2021
2022
2023
$4 9, 9,6 29 29. 8
$52 ,1 $5 ,13 8. 8.4
$5 4, 4,9 68 68.6
$ 57 57,7 21 21 .8 .8
$ 60 60,02 9. 9.4
$61 ,8 ,82 9. 9.4
$ 36 36,3 29 29.9 (16,189.0)
$ 39 39,2 05 05. 7 (17,484.6)
$41 ,9 ,93 6. 6.7 (18,398.1)
$4 4, 4,4 74 74.0 (1 ( 19,424.8)
$ 46 46,6 87 87 .9 .9 (2 ( 20,426.4)
$4 8, $4 8,55 4. 4.5 (21,273.9)
$50 ,0 ,01 5. 5.3 (21,945.4)
18,373.9 4,698.4 4,399.3 ( 7, 7,606.4) (324.9)
20,140.9 4,921.7 4,769.9 ( 8, 8,291.0) (321.6)
21,721.1 5,262.1 5,161.9 ( 8, 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 11,423.0) (156.3)
$19,540.4
$21,219.9
$22,879.3
$23,864.8
$25,117.7
$26,393.1
Unlever Unlever ed Free Cash Flow (UFCF) (UFCF)
Unlevered net inc ome ( + ) Depreciation & Amortization ( + ) Stock Based Compensation ( – ) Capital expenditures ( – ) Change Change in w orking capital Unlevered fre e cash flow
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$27,464.8
$28,304.7
Assumptions
Net debt
$
Fully diluted shares outstanding WACC
Exit Multiple
(51,444.0)
Current Share Price
678.400
Market Cap
542.09 367,753.86
9.7%
10.0x
Sensitivity Analysis
Ente r pr is e V alue
Equit y V alue
Terminal EBITDA Multiple
########## Discount Rate (WACC)
8 .0x
10.0x
Terminal EBITDA Multiple 12.0x
Rate (WACC)
12.0x
8.0x
Implied Upside 10.0x
$3 $3 58 58 ,8 ,8 86 86 .6 .6
$ 42 42 8, 8, 37 37 3. 3. 5
$ 49 49 7, 7, 86 86 0. 0. 4
8.7%
$410,330.6
$479,817.5
$549,304.4
8.7%
11.6%
30.5%
9.7%
$3 $3 58 58 ,8 ,8 86 86 .6 .6
$ 42 42 8, 8, 37 37 3. 3. 5
$ 49 49 7, 7, 86 86 0. 0. 4
9.7%
$410,330.6
$479,817.5
$549,304.4
9.7%
11.6%
30.5%
10.7%
$3 $3 46 46 ,6 ,6 31 31 .6 .6
$ 41 41 3, 3, 46 46 4. 4. 1
$ 48 48 0, 0, 29 29 6. 6. 6
10.7%
$398,075.6
$464,908.1
$531,740.6
10.7%
8.2%
26.4%
Terminal EBITDA Multiple 8.0x 10.0x
10.0x
8.7%
Im plie d Pe r pe t uity Gr ow t h Rat e
Discount
8.0x
12.0x 49.4%
49.4% 44.6%
V alue Pe r Shar e
12.0x
Terminal EBITDA Multiple 8.0x 10.0x
12.0x
8. 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 10.7%
4.7%
5.9%
6.6%
$586.79
$685.30
$783.82
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