A Cocktail Napkin Estimate for Google’s Android

Google, an iconic American brand.In a recent Wall Street Journal interview, the typically tight-lipped Google (NASDAQ: GOOG) CEO, Eric Schmidt,optimistically professed that the Android line of business could easily turn into a “10-plus billion-dollar business.”  When the typically cautious and modest Google CEO speaks, I like to listen.  Google as a company does not offer quarterly EPS guidance, so this type of insight from CEO Schmidt provides us investors with a good gauge as to how Google’s businesses are performing.

With this $10 billion revenue number for Android in mind, I decided to put together a quick projection for what this could do to the company’s bottom line.  Over the past 10 quarters, Google has an average net margin of 24.2%, which includes an incredibly low 6.71% during Q4 2008 while in the depths of the financial crisis.  At no other time during this period did Google report a net margin lower than 25%, and more recently, the number has been upwards of 28%.  For modesty’s sake, let’s assume a 24% net margin for this projection.

Over the past 12 months, Google has generated $26.21 billion in revenues.  $10 billion alone would represent a 38% increase to the company’s revenues.  Applying a net margin of 24%, Android would contribute $2.4 billion in earnings, which amounts to $7.50 per share.  At Google’s present p/e ratio of approximately 21, Android alone should add $157 to Google’s share prices.  Such an increase in price over today’s level would put the company’s shares at somewhere in the vicinity of $640.

Now keep in mind, these numbers are predominantly modest, considering the fact that Android itself should be a high margin earnings generator for the company, yet I am applying a low-end number, and Google’s shares now trade with a PEG (price/earnings to growth ratio) of barely more than 1.  A PEG close to 1 is indicative of relatively cheap growth.  If Google’s shares get any sort of multiple expansion, like to an industry average p/e of 25, then their shares could increase by an extra $30 to the $670 neighborhood.  And all this is assuming no growth on its core search business, and zero revenue generation from the company’s various other endeavors including the upcoming GoogleTV.

All this bodes particularly well for the company moving forward.  I personally have a hard time not being optimistic about this iconic company’s ability to monetize on the rapid uptake of the Android operating system. When Warren Buffet looks to make a long-term investment he asks some of the following questions: is the business understandable?  Does the company have a moat around its core business?  Does the company generate high levels of cash flow?  And, does the company have an iconic brand-name and image?  Google is a resounding yes to each of the preceding questions.  Google is a cash cow whose name is now synonymous with Internet search throughout most of the world.


Disclosure: Long GOOG

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