Why the Analysts Are Right on Their $1000 Price Target
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Whether you rely on analysts’ recommendations on how to play a stock or you take analysts’ thoughts with a grain of salt, there are times when their actions are worth taking into consideration.
A case can be made for following their recommendations now for Google (NASDAQ: GOOG). Not only do a significant number of analysts have it marked as a buy, but there are almost a dozen that have $1,000 price targets for the stock. The only other stock within striking distance of $1,000 is Priceline.
Who likes Google?
Barclays Capital, Needham & Company and Cantor Fitzgerald were among the firms that recently increased their price targets for Google. Their actions took place from May through last week. Barclays and Needham raised their price targets to $1,000, while Cantor Fitzgerald raised its target to $1,030. Evercore Partners went even further and raised its target to $1,050.
The other companies that have price targets of $1,000 or more include Sanford C. Bernstein, Robert Baird and Jefferies Group.
One of Google’s most recent efforts aimed at increasing ads on mobile devices is gaining steam, and it is another reason behind optimism that the stock will hit $1,000 sooner rather than later.
Launched earlier this year, the product was designed to help businesses more easily have their ads displayed on mobile devices. Called Enhanced Campaigns, analysts at Cantor Fitzgerald cited this effort as one of the reasons for its price target increase. Businesses that use Google's older, so-called legacy, campaigns have until July 22 to upgrade to the enhanced campaigns. Observers point out that it can be pricier, but the benefits could make up that difference for businesses, especially for those that are small to medium sized.
That July 22 deadline falls about a week after Google releases its earnings report for the second quarter. It reports on July 15, and we should get an idea about how the enhanced campaigns are going then. Remember, Google derives more than 90% of its revenues from advertising.
Then there’s YouTube. Of all of Google’s acquisitions, this has turned out to be the most lucrative. Just how lucrative YouTube is remains unclear because Google does not break out revenue figures for the video service.
No matter, that has not stopped Wall Street analysts from trying to figure it out. What seems to be clear is that much of YouTube’s success also stems from mobile. It is estimated that as much as $350 million of Google’s roughly $14 billion in sales last quarter came from revenues raised through mobile ads on YouTube.
Morgan Stanley estimates that YouTube’s gross revenues this year will be $4 billion, generating roughly $711 million of operating income. Morgan Stanley pegged the video service’s revenues at $20 billion and its operating income at $5 billion by 2020.
Not bad for a company bought for $1.65 billion seven years ago.
What Google’s YouTube offers is unrivaled by its chief competitor in the space - Yahoo! (NASDAQ: YHOO)
However, strides being made by the web portal are noteworthy. As CEO of Yahoo!, Marissa Mayers has made it clear that she wants to help grow ad revenues by offering video streaming services. Thus her entry into the bidding war for Hulu with an offer ranging between $600 million and $800 million.
In what could be considered her biggest coup yet in video streaming was usurping the rights to air Saturday Night Live reruns. In April, Yahoo! announced that it had partnered to bring SNL archives from 1974 through 2013. Hulu and NBC.com previously held the exclusive rights. The fact that Yahoo! managed to wrangle such a catch from these heavyweights, which clearly had an edge considering how popular they are, is impressive. More coups like this could very well help close the competition gap between Google and Yahoo!.
Signs point to YouTube making headway in revenue growth through mobile video-ad sales. However, when it comes to display ads in general Google has its hands full with Facebook (NASDAQ: FB). An advantage Facebook has over Google is its increasing growth with mobile advertising. This can be seen in how much market share Facebook carved out in mobile ad display last year versus Google. It snapped up 18.4% of the market compared to Google’s 17%. That’s small, but in this high stakes game, it is still too close for comfort.
The bottom line
There’s no question that Google is a force to be reckoned with in just about every tech space there is. Its main focus will continue to be on its bread and butter search engine business due to the ad revenues it generates. However, by entering several other businesses, Google is furthering the reach of its brand and the number of consumers that are directed to its properties who may inevitably click on an ad.
So, I think it’s fair to say that Google’s $1,000 price targets from analysts are more than feasible. At the time of writing (during intraday trading on Tuesday), it was within $4 dollar of breaking through $900 a share…again.
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Tedra DeSue has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!