Source: Facebook, Google.
What: Search giant Google (GOOG +2.83%) (GOOGL +2.53%) saw its Class A shares (GOOGL) rise $3.77, or 0.7%, in Tuesday's trading session, to close at $578.79, following a price-target increase from UBS.
So what: According to Eric Sheridan, the covering analyst at UBS who kept his firm's "buy" rating on Google's Class A shares but upped its price target from $630 to $670, investors are seriously underestimating Google's sustainable desktop and mobile business model and its potential to return significant capital to shareholders in the future.
Among the highlights of Sheridan's research note to investors, he opines that desktop search revenue will remain a key contributor to Google's top-line over the long run; that Google's mobile services have been gaining mainstream traction; and that it has an excellent opportunity to build upon its mobile positioning thanks to its Android operating systems apps.
Perhaps no catalyst stood out more than Sheridan's belief (a belief that's shared by other analysts on Wall Street) that Google will follow in the footsteps of Apple by initiating a dividend and instituting a substantial share buyback sometime this year.
If Google's Class A shares were to hit Sheridan's target, the company would offer 16% upside from Tuesday's close, and it would be sporting a market valuation of $456 billion, good enough to take the No. 2 spot behind Apple.
Source: Google.
Now what: The question that investors should be asking here is just how feasible it would be for Google's Class A shares to hit $670. Keep in mind that while they don't trade perfectly in tandem, a 16% rise in Google's Class A shares would likely cause a nearly equal jump in its Class C (GOOG) shares.
On one hand, there are risk factors to purchasing a search powerhouse like Google. Perhaps its biggest risk is just how reliant the company is on ads (both desktop and mobile) for its survival. Based on its Q4 earnings report, just 11% of its $18.1 billion in revenue came from its "other" segment, with the remaining 89% of sales in some way tied to desktop and mobile ads. The business model has worked marvelously for years, but as with any ad-based company it'll ultimately be reliant on growth from the U.S. economy to drive ad-spending growth and support its ad pricing power.
On the other side of the coin, Google is extremely profitable and its traffic acquisition costs as a percentage of revenue were down in Q4. With a majority of desktop search market share and a substantial share of mobile advertising (along with deep pockets), it's going to be difficult to unseat significant market share from Google.
I believe the magnitude of Google's expected capital return to investors is really going to set the stage for how high the stock will head in 2015. Ultimately, with Google expected to grow its EPS from $25.59 in 2014 to a Wall Street-estimated $44.18 by 2018, I'd suggest that $670 seems pretty attainable and reasonable -- perhaps not all this year, but at some point in the intermediate future.
