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Cloudy Days Ahead For Google: Google's Share Value Hidden In The Cloud!

Reggie Middleton's picture




 

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Just a day or two after describing the extreme undervaluation of Google shares on CNBC, Google releases its cloud storage platform -Google Drive. For those who may not comprehend the significance of this move, Google has now entered (with both feet planted firmly on the ground) the enterprise, SMB and consumer cloud business in a profound way that it has never done before.

Before Drive, Google was arguably the most prolific cloud computing company for the masses and making inroads towards the enterprise. Now, with 16 TB plans, it plans are literally deadly to the competition and clearly show that this is no mere online ad agency and/or search company. The key to Google's dominance in cloud computing and the SMB/enterprise space is its massively successful mobile initiative. Wait! I'm getting ahead of myself. Let's take this from the beginning...

Google is known as the world's larges and most successful internet search engine. As a result of it's massive search reach, it has enabled automated, DIY web advertising, a business from which it derives most of its revenues and profits. This automated advertising model is low cost, high volume, high margin - a combination made in investor heaven. Of course, nothing lasts forever, and although the business and its margins are still growing at a healthy clip (see Google 1Q 2012 Earnings Update), nothing lasts forever. Google's astute management is well aware of that and branched out into mobile heavily about 5 years ago with its successful, yet oft misunderstood Android buisiness model as referenced by the piece I penned two years ago (yes, this business model and opportunity was obvious and evident two years ago) - Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space:

Many commenters are lamenting on the fact that Google is not making money on Android sales since the OS is given away for close to free while Apple is making $250 per handset sold. Those who are looking at it from this perspective are missing the forest due to that big fat tree that is in their way! Yes, Apple is making a killing on its iPhone sales, and it would be difficult to attempt to catch them with a fat margined product. They have managed to produce both margin and volume and have wrapped it up with extreme customer loyalty. What the armchair pundits are missing is the power of reach. Google is developing massive reach, and developing it ridiculously quickly. A byproduct of this reach is the commoditization of the smart phone platform which will probably cut the fat margined business model off at its knees. That is not to say that Apple will be cut off at the knees, but they will have to alter their business model for the competitor-less margin that they enjoyed for the last three years will no longer be a given. It also means that anyone else reaching for the crown (including Apple) will have to spend more upfront to gain less per unit sold. This actually benefits Google, for they are not in the hardware race, yet they benefit from each and every handset, tablet, desktop and automotive unit sold. Google is trying to become the new Microsoft!

In the meantime, Google ramps up the potential to push software as a cloud service, downloadable software and interactive, activity/context sensitive rich media ads and services to hundreds of millions of new users. This opens up a phenomenal opportunity for Google, and it appears as if many are missing the point because Google (wisely) decided not monetize it immediately, but to let it gestate and grow. Do you remember 15 years ago when many felt the same about search and the fact that Google wasn’t making any money providing search (pre-advertising)? Now this is not to say that Google is going to win the Smart Phone Wars, although at this point Google looks like the number one contender (IMO, Apple, Google and Microsoft are the ones to look out for).

Google now derives approximately $2.5 billion in annual revenue from mobile advertising, and that is from nearly all platforms, not just its market dominating Android platform. Remember, Google is not longer a simple ad company though. Mobile searches have quadrupled in the last year, for many items one in seven searches are now mobile. Approximately 71 percent of smartphone users that see TV, press or online ad, do a mobile search. This puts a significant amount of power in the hands of those companies that can control the mobile platform. 

 

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All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. 

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Many mobile Web users are mobile-only, i.e. they do not, or very rarely use a desktop, laptop or tablet to access the Web. Even in the US 25 percent of mobile Web users are mobile-only.

Popular media would have one believe that the mobile opportunity is in mobile apps, and indeed, over 300,000 mobile apps have been developed in three years. The site mobithinking.com states apps have been downloaded 10.9 billion times, but demand for download mobile apps is expected to peak in 2013The most used mobile apps in the US are games; news; maps; social networking and music. Facebook,Google Mapsand The Weather Channel (TWC) are the kings here. Mobithinking.com compendium research asserts the average download price of a mobile app is falling rapidly on all vendor app stores, except Android. And 1 in 4 mobile apps once downloaded are never used again.

So where is the opportunity? Commerce and the cloud!!! Again, as sourced from Mobithinking.com:

Mobile payment, NFC, m-commerce, m-ticketing and m-coupons

1) Paying by mobile i.e. m-payments will be worth US$240 billion in 2011 and could be over US$1 trillion by 2015. Purchasing digital goods is the largest segment ahead of physical goods, near-field communications (NFC), m-banking and money transfer. Biggest market today is Japan, but in the future could be China.
2) Japan sets the precedent for m-payment 47 million Japanese have adopted tap-and-go phones, but is expected to take off elsewhere as the world adopts NFC. In China alone, there will be 169 million users of tap-and-go payments in 2013.
3) M-commerce is predicted to reach US$119 billion in 2015, Japan remains king. Top m-commerce retailers globally include: Taobao, Amazon and eBay. The US m-commerce market will be US$31 billion by 2016.
• 1 in 8 mobile subscribers will use m-ticketing in 2015 for airline, rail and bus travel, festivals, cinemas and sports events.

Who is at the forefront of NFC enabled mobile hardware? You guessed it, Google. As a matter of fact, Android handsets are the only handsets sold stateside that feature NFC (near field communication) capabilities needed for this new form of mobile commerce. Now that we're discussing it, whose software/firmware financial transaction platform has the biggest headstart, by far? You guessed it again - Google and theirGoogle Wallet.

This brings us back to reach. Google's Gmail has approximately 350 million active users! Gmail is now tightly integrated with ALL of Google's cloud services. Thus, if you use one of them, chances are you will be, if not already doing so, using much of the rest of them. 350 million is an impressive number, yet even this impressive number looks to be outdone by the juggernaut that is Android. Asymco.com posed the question, When will Android reach one billion users?

The latest data from Google shows that the Android activation rate is increasing at a relatively steady rate (i.e. acceleration is constant). The data provided so far is in the blue circles below. The green line is the interpolation and extrapolation of that data.

As the graph is projected forward we get an activation rate of one million per day by mid August of this year. If it continues then we could see 1.5 million per day by end of 2013.

The corresponding number of cumulative activations is shown on the following log chart (with blue circles showing the actual data and the green estimates.)

The forecast is therefore that Android activations will cross one billion by November 2013.

The following chart compares the growth ramps of the various mobile operating systems indexed from the same starting points (measured in quarters after launch).

If Android does keep accelerating at the same rate then it will reach a billion users in five years....

 These numbers are phenomenal, but what do they mean in the context of Google's share price. Well, this brings us back to Google Drive as an example...

Gogole_drive_pricing

200 GB is consdierably larger than most endusers desktop storage capacity. Assuming in 2013, at a billion users, Google is able to convert 2% to paying consumer retail drive clients (this number is ridiculously conservative as anyone who has used Dropbox can attest) and .03% to SMB/enterprise clients (again, ridiculously conservative).

  Paying Users Annual Price Annual Revenue
Retail          20,000,000  $                  120  $                    2,397,600,000
SMB/Enterprise            3,000,000  $                  600  $                    1,799,640,000
       $                    4,197,240,000

 

As you can see, Google drive represents an additional $4.2B in revenue alone. This does not in anyway take into consideration the additional network effect revenue knock-ons that will assuredly accrue in Google's favor, ex. Google Docs adoption, Google Voice usage, synergistic Android handset sales, and last but not least higher ad revenue from higher usage as users share files with friends who are not paying subscribers.Add on mobile commerce, and the dozen or so other NEW Google franchises and you can see that valuing this company as a search engine provider is downright foolish. 

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives...


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

 

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Mon, 04/30/2012 - 11:29 | 2385135 pan
pan's picture

Apple is a brand, a snobish nouveau riche brand.  It's just not compatible with the cloud.  It needs to pull its nose out of its proprietary, IP locked in cloud to be competitive. 

Mon, 04/30/2012 - 11:40 | 2385166 Zero Govt
Zero Govt's picture

how many errors in a minute? ...sure you're not on Microshite?

Mon, 04/30/2012 - 11:23 | 2385116 pan
pan's picture

Apple is a brand, a snobish nouveau riche brand.  It's just not compatible with the cloud.  It needs to pull its nose out of its proprietary, IP locked in cloud to be competitive. 

Mon, 04/30/2012 - 11:31 | 2385140 pan
pan's picture

This second post in error, was made on a mac.

Mon, 04/30/2012 - 11:38 | 2385163 Zero Govt
Zero Govt's picture

that's it blame the Mac, not Goofy and his knuckles

Mon, 04/30/2012 - 10:07 | 2384895 Stuck on Zero
Stuck on Zero's picture

There's nothing preventing Apple from making an open alliance with Amazon or eBay/PayPal.  That would immediately give them a cloud to work with. 

Fri, 05/04/2012 - 09:09 | 2396428 kall
kall's picture

Let them all use the cloud virtualization, after all, it's the tough competition that took us to this point. As long as they are being fair to their customers just let them be.

Mon, 04/30/2012 - 10:19 | 2384946 Reggie Middleton
Reggie Middleton's picture

None of the companies you mentioned have an infrastructure or front end, or reach that even comes close to rivaling Google's. Ask the users of Apple's iCloud that have also used Google's services. Microsoft has the most capable IP and infrastructure, but its management seems to have forgotten what it means to move at Internet speed.

Mon, 04/30/2012 - 11:03 | 2385070 Ying-Yang
Ying-Yang's picture

Yes Reggie and MS announced this morning they bought 17% of Barnes and Noble to dip their toe into E-books. MS is late to to the party on most things now.

Mon, 04/30/2012 - 11:39 | 2385158 derek_vineyard
derek_vineyard's picture

Then the REAL trade for a BEAR (bust predictor) is a PAIRED trade..........long goog, short appl

Mon, 04/30/2012 - 09:28 | 2384773 williambanzai7
williambanzai7's picture

THE REGGIE RAPTURE

Tue, 05/01/2012 - 05:23 | 2385155 Zero Govt
Zero Govt's picture

Is the sun rising in Goofballs empire of Apple copy-catting.. or is it setting and about to burn down in flames?

 

Mon, 04/30/2012 - 09:50 | 2384767 Ranger4564
Ranger4564's picture

Amazes me that no one seems to care that ownership is being stripped away for the convenience of leasing....  Without ownership, you are nothing more than a user, borrower, serf.  Keep your head in the clouds, counting your coin while abandoning any semblance of a soul.  What a fucking joke.  I can't stand what you're doing not just to your life, but more importantly to the lives of all the other people, including mine.  Is it too much to ask for some thought before drooling over profit margins and investment opportunities?  Consider the implications, there is a trajectory to all of these "innovations", and unless there is a plan unbeknownst to me to be benevolent, there is only one outcome... indentured servitude. 

Ownership is overrated, except it's essential in a capitalist system.  Let me know which side you are on before the shooting starts.

By the way, I have for your consideration, a nice lease offer on Adobe CS6, just $19.99/mo.  Why buy at $999 for the permanent license when you can subscribe to the perpetual lease?  Why would Adobe offer CS6 for 1/4 less on lease?  Why ask why when the deal is as good as sex, only without the mess!

Go ahead, delete this, the original is stored on my gmail cloud android so i can google it from everywhere. Shh, don't tell anyone.

Mon, 04/30/2012 - 11:16 | 2385098 Ying-Yang
Ying-Yang's picture

I agree Ranger but to me the issue is security. Nothing on the Cloud is secure. When you move your business or personal data off your secure local hard drive to anyone's cloud the data can and will be at risk. No matter what anyone sells you cloud computing is not as secure as a drive you own, operate and can unplug from the Net.

White Hats like me understand why they want the population to move to the cloud. All the cloud means is that you have moved your stuff off your hard drive to someone's server. Who are these people and what will they do for you if things go bad?

Take your medical information. You do know it has been mandated that all US medical information be converted to electronic storage. To help lower costs.... chuckle, BS. To gain access to personal medical histories you have to digitize it first before including the information into national databases. Great way to control medical expenses right? It is coming to a neighborhood close to you. Ask you doctor about it.

Mon, 04/30/2012 - 08:54 | 2384706 bank guy in Brussels
bank guy in Brussels's picture

The CIA's main internet tool, Google Inc. - Here you see a web photo of Google's live censoring and blocking of websites on US court corruption, by an important political refugee from the US in Belgium. I have met him, he is under the protection of the Belgian monarchy here against US threats to murder him. (I use a photo from one of his sites as my avatar on ZeroHedge, as a way of honouring him). He is a dissident, non-Zionist Jewish Sachs very much unconnected with Goldman Sachs, and Google is blocking his web work and trying to destroy him:

Live Photo: Google Inc. Caught Censoring EU Search Results (for USA - CIA)
Google Internet Censorship - Censure d'Internet par Google - Internet censuur door Google
http://www.flickr.com/photos/22325431@N05/6100668211/in/photostream

'Ex-Agent: CIA Seed Money Helped Launch Google', retired intelligence agent Robert David Steele interviewed by Paul Joseph Watson, and speaking of the CIA's Dr Rick Steinheiser and his connections with Google:
http://www.infowars.com/articles/bb/google_cia_seed_money_launched_googl...

Current case: Wikipedia and Google in the attack on Europe, trying to murder European citizens criticising the USA:
Report to the EU Parliament and the Commission of the European Union
Anti-Competition Crimes of EU Internet Monopoly Google Inc. (with CIA) and Wikipedia (with CIA), to Erase EU Journalism, to Slander and Murder EU - Polish Citizen, Writer, Journalist,  Non-Zionist Jew
http://www.indymedia.nl/nl/2011/07/77181.shtml

Mon, 04/30/2012 - 11:01 | 2385061 Ying-Yang
Ying-Yang's picture

It is not just Google. Apple, Rim and others have given in to pressures. Do you know that your ISP, your telco is making big bucks each year allowing the PTB to tap the data running through the pipes? Most commonplace now with not much oversight.

What in the world is the Utah data center for? To store all data transmissions from as many sources as possible then to develop algorithms for predictive profiling.

Mon, 04/30/2012 - 12:03 | 2385228 NotApplicable
NotApplicable's picture

But they're just looking at the email headers of the bad guys, honest!

Sat, 05/19/2012 - 13:11 | 2443388 l.hauri
l.hauri's picture

I guess that they will be top cloud computing providers. Maybe we will see a better service that the Dropbox.

Mon, 04/30/2012 - 08:42 | 2384685 YHC-FTSE
YHC-FTSE's picture

Yep. Thanks mate. That's a great summary of Google: Not a juggernaut in the making, but a titanic iceberg with most of its assets beneath the surface. There's no argument that Google is one of the most undervalued companies out there with resources to sink any business that gets in its competitive sights. Make money off them, sure, but unless you are stupid enough to trust their credo, "Do no evil", I would stay clear of them as a user, although opting out of Google is becoming more and more difficult.

 

Whether I like it or not (I don't), I guess this is the way the world is heading - absolute control of user behavioural data, and insightful integration beyond the dreams of any advertiser, politician, or spook to see what the average joe is up to. NFC is just upgraded RFID by another name, and there have been plenty of articles already about the dangers of pernicious RFID chips in retail logistics and personal IDs that can track individuals from cradle to the grave. Interweave that with Android o/s, Google Cloud, GMail (Calendar, Documents, Search, Shopping, Blogger, reader, Finance....+), Wallet, and mobile/cell comms - what do you get? You allow Google access to every aspect of your life. It's going to happen so you might as well make money off them. 

Mon, 04/30/2012 - 08:33 | 2384668 Jack Sheet
Jack Sheet's picture

Leaving the cloud aside momentarily, It would help if Google could get Android 4 off the ground, most Android smart phones are incapable of accomodating the update.. Apparently the hardware is too diverse. It would also help if there were a tablet out there with even remotely the ease of use of the iPad 2. I speak from the immense frustration of having searched for an Android tablet and finally giving up. Just one example: 10 hour battery life on the Apple product, max 5 hours on the nearest samsung competitor.

Mon, 04/30/2012 - 10:54 | 2385045 Ying-Yang
Ying-Yang's picture

It is the old Microsoft vs Apple situation, now with Google vs Apple. Google (Android) has many more platforms to be compatible with as opposed to Apple who controls everything in house. Reggie has been spot on his analysis of Google from the beginning.. good article.

Mon, 04/30/2012 - 10:16 | 2384926 Reggie Middleton
Reggie Middleton's picture

My Samsung tablet does about 10 hours, give or take, and my Transformers do from 9 to 18 hours. The iPad is no easier to use than these tablets, a whole lot less capable to boot. Thus I gave the iPad to my mother, who wants to know why she can't watch the same videos on her iPad as I can on my transformer and tab.You should try to use the tablets first. As for Android 4, most smartphones still are the most capable on the market running 2.3 (outside of the Androids running 4), so there is no real reason to upgrade them to 4.

Mon, 04/30/2012 - 10:44 | 2385019 YHC-FTSE
YHC-FTSE's picture

The latest iphone still hasn't got NFC either, although I'm told that it's coming in Q4 this year - late to the tech as usual. I expect lots of adverts from Apple pretending to have "invented" NFC around xmas using dancing dickheads paying for their starbucks fraps by knocking their iphones on the heads of baristas. 

Mon, 04/30/2012 - 12:05 | 2385234 Buckaroo Banzai
Buckaroo Banzai's picture

It is so funny to hear the tech geeks crying about Apple's tech.

Apple is NEVER on the cutting edge. That's a low margin business, with limited demand. Apple is happy to make craploads of money being slightly behind the tech curve, and leaving the harder, lower-margin stuff to others.

 

Mon, 04/30/2012 - 08:10 | 2384616 Non Passaran
Non Passaran's picture

Now is the right time for the telcos to start charging for bandwidth - there is $4 billion reasons to get some ROI for the top 20pct of subscribers...

Mon, 04/30/2012 - 10:51 | 2385036 Ying-Yang
Ying-Yang's picture

They are starting to. ATT only has grandfathered accounts for unlimited data and out of those they throttle back data speeds for heavy users constraining them from using bandwidth.

Most telcos trottle bandwidth without the user knowing. Users will become more sensitive to this issue as streaming matures.

Mon, 04/30/2012 - 11:39 | 2385161 Reggie Middleton
Reggie Middleton's picture

Verizon has been doing this since 2003. I actually noticed it on my account. The problem is this will not be enough. See US Celllular Carriers Are At Risk Of Being Marginalized Into Nothingness Unless They Learn To Think Outside The Box... Yesterday

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