More, if interested after the jump.
But first, a deep dive from FT Alphaville, Nov 1:
Jeff Henriksen is the co-founder and CEO of Thorpe Abbotts Capital, a value-oriented hedge fund based out of Charlottesville, Virginia, and Associate Fellow at the University of Oxford’s Saïd Business School where he teaches financial modelling and valuation for executive education. In this post Henriksen explores how Google has grown to dominate the digital advertising business, and what impending regulation might mean for its core assets.
Valuing Alphabet, Google’s holding company, requires multiple hats. There are many moving parts to consider as well as a lot of negative headlines.
My preferred method of analysing Alphabet’s stock price is to place a reasonable value on all of the company’s non-advertising-related businesses (such as its infamous Other Bets, YouTube and cloud-computing offering) adding to that figure its net cash and long-term investments, before finally subtracting this total from the its current market capitalisation. In effect what your left with is the implied market value of Google’s core advertising business. From this point one only has to decide what multiple they are willing to pay for the ad business’s operating earnings to see if Mr. Market is offering up a fair price for the equity.
While I am not going to go through that calculation in this article (although if you do you will find the core advertising business to be attractively valued), I want to discuss what the antitrust investigation into Google’s advertising business might mean for Alphabet’s crown jewel.
Understanding Google’s advertising business
Google’s advertising business reports ad revenue through two channels: Google property revenues and Google network members’ properties revenues.
On the surface the businesses seem simple enough — it sells targeted advertising. However, its value is a little more complicated than that. The power of its economic moat lies in the way Google is connected to the larger digital ad ecosystem.
Let’s start with the basics.
When you search for something on Google — say, a new bike — you will immediately see ads for the bike next to your search results. You might also see similar ads in YouTube videos you watch, or ads that come up when you use Gmail or Google Maps. These are Google property revenues — targeted ads that the company sells on its own web properties.
Google makes the most on these ads as it doesn’t have to pay to have them hosted on a third-party site. The chart below shows the gross profitability on these ads over the past six years:
After you have spent some time searching for a new bike, you might also notice that the ads start following you around the internet. Maybe you also went to a site to look for cycling trips in the French Alps, and then those ads start following you around as well. You may wonder why this has happened. Well, Google has collected this data on you and served it up to advertisers who place the ads on third-party websites. These are Google Network Members’ properties revenues. Google makes less gross profit on these ads given it incurs costs to deliver the ad on someone else’s internet property. Here’s the chart for that business line:........MUCH MORE
*What Alphabet Really Fears: Why Google Won't Make Google Search the Default in Android For Europe
