It's pretty clear that investors are willing to pay a lot for the future growth of Google (NASDAQ:GOOG). With $1.6 billion in free cash flow generated in 2005, Google's price-to-free cash flow multiple sits at a lofty 74. Indeed, the online search giant's high value is revealed whether we look at discounted free cash flow or peer free cash flows, or even if we compare one share of Google to an ounce of gold. To make it a worthwhile investment, it seems we must be prepared to embrace the idea that Google will take over the world -- at least the advertising world.

Google's mission statement is "to organize the world's information and make it universally accessible and useful." It's a long way from reaching that goal in a general sense, but the story is completely different when considering what's been accomplished in advertising.

Beyond cyberspace
With its ability to increase the efficiencies of Internet advertising, the search industry has seen a huge influx of money over the past few years. The successful online advertising revolution has led Google to extend itself beyond the barriers of cyberspace in an attempt to increase the efficiency of advertising in other media. In the third quarter of 2005, for example, the company launched its Google Publication Ads Program, which allows Google's advertising partners to distribute ads in magazine publications. And last week, the company continued its focus on the non-Internet advertising industry when it announced the acquisition of dMarc Broadcasting, a company that provides automated services to help both advertisers and broadcasters more efficiently schedule and deliver radio ads. The deal will cost $102 million in cash, but incentives could bring the total to $1.14 billion over three years. The technologies that come with the deal will be integrated into Google's AdWords system, which, along with the AdSense program, is the source of Google's advertising prowess.

With Google continually seeking out new sources for advertising revenues, we should take a look at what the advertising market is like globally. Figuring out how much of the advertising pie Google can consume will help us grasp the potential for future revenues.

There is a wide range of estimates for the global size of the paid-search industry. For 2010, expectations fall between a conservative $20 billion and a more bullish $33 billion. Google should take in somewhere around 40% of the $10 billion expected in 2005. Continued dominance of the market would translate to somewhere between $8 billion and $13 billion in revenues for 2010 for Google.

Entry into the magazine and radio advertising industries means inroads into the global advertising market -- a market that, excluding the Internet, is expected to be worth more than $500 billion in 2005. If Google AdWords can be successfully adapted for use in radio and other media advertising, it may be able to snag a few percentage points of this market. That could push the revenue range between $13 billion and $23 billion in 2010. Assuming similar free cash flow yields in the future, we can expect a free cash flow range of $3.4 billion to $6 billion.

Hard work ahead
Using those free cash flow numbers, let's see how Google can provide investors a market-beating return. That means exceeding the 9.3% average yearly return of the S&P 500 over the past 10 years, so we should use an expected compound annual growth rate (CAGR) of 15%-25% in the value of the company. Based on a $400 stock price and a dilution rate of 4% on the 296 million current diluted shares, the following chart shows the free cash flow multiples necessary for those returns through 2010.

Price CAGR


Market Cap

FCF multiple













Is it really possible to justify these high free cash flow multiples? To retain the current multiple of 74, the outlook for the future in 2010 will have to be just as optimistic as it is today. While 25% returns are possible, that's based on perfect execution in penetrating many new advertising markets and keeping future growth estimates very high. I think it's more likely that Google will succeed in some of the new markets, at a level that will keep growth rates high, but not high enough to sustain such a lofty multiple. Returns below 20% seem much more likely.

Without much margin of safety, preservation of wealth isn't a leading characteristic of Google's stock price. However, the element of surprise can keep expectations high even in the face of a minor stumble. New products are constantly being released, often with little or no notice. At any time, one of them could begin to generate significant revenues. Maybe it will be the new video content site launched earlier this month, or a new handheld-device advertising market.

Wherever the stock ends up in 2010, it's likely to be a bumpy ride. Recently, the specter of a court case brought by the federal government created a temporary 10% decline, and that bump was followed by another 7% drop to about $400 after the company's fourth-quarter earnings release.

But even so, Google has some Rule Breaker characteristics that make it an enticing investment for the long term.

Fool contributor John Bluis has been doing Google searches for many years but has never owned any shares. The Motley Fool has a disclosure policy.