Three Reasons Why Google's Valuation Could Vault


Google's (GOOG) last quarterly earnings disappointed Wall Street. The sentiment in Silicon Valley, too, hasn't been favorable lately for the big G. In a recent blog post on TechCrunch, former venture capitalist Peter Sims recounted an informal poll at a dinner of tech luminaries. They almost uniformly agreed Google has peaked and should be shorted.

The logic? The search advertising bonanza is nearly mature, and Google would have to settle into a middle-aged existence of more moderate growth. But I'm a Google bull (and, full disclosure, a Google shareholder). I think both the Street and retail investors are missing critical pieces of the picture. No, I don't mean YouTube video ads or display ads, which are doing well now. I think the growth of both of those segments is more or less baked into Google's existing ad-based valuation.

Rather, I see a minimum of three relatively new and potentially explosive growth areas for Google. Here are the three biggest reasons why Google may in fact be undervalued.

Google Voice

Skype just filed for an IPO. So, this is where Google Voice starts to get real. When Google opened up the beta to Google Voice, the search giant came one step closer to competing head-on with Skype in the lucrative market of self-service telephony running atop of a user's Internet connection.

I'm a Google Voice user (I actually tie my Skype calls into it) and a big fan. Having a single phone number that rings all other numbers is a huge convenience. I reprogram those numbers from any live Internet connection, constantly morphing my connectivity on demand. Google Voice's feature set runs from free voice-mail transcription to text to recording options to complex call-handling routines and call groupings.

The only thing missing right now is a software-based phone that can run on a laptop or computer and originate calls without requiring another phone number for relays. That's clearly coming through Google's acquisition of Gizmo5. I'm already paying small fees for international calls. When Google Voice finally gains its full set of features and builds out a revenue model, I think a Skype-like valuation is conservative. In other words, that's $2 billion extra in valuation and possibly more because Google won't spin out Skype, and the segment is set to explode.

Google Apps Marketplace

This relatively new addition to Google's lineup allows companies that sell software-as-a-service (SaaS) to offer all manner of products to businesses that use Google Apps (the online productivity, email, and calendaring suite). Google is hardly alone in this world. (CRM) is the king of the apps marketplace, and other players are chipping away. But Google has a very strong foothold because many of these services, such as customer-relationship management, financial tracking and invoicing, tie directly into the popular Gmail client and Google's own online applications suite.

Google, naturally, takes a share of every subscription sold on its Apps Marketplace. The ecosystem of SaaS is seeing explosive growth as more and more businesses grow accustomed to running their entire enterprise infrastructure on a virtual basis. Witness the impressive rise in Salesforce's stock price over the past year from around $55 per share to over $100. Salesforce now has a market capitalization of $13 billion.

Google could easily get half that much if the Apps Marketplace takes off, as I believe it will. Add that to Google Voice, and you're talking conservative numbers of $8.5 billion in additional market cap.

Google Checkout

Without a doubt, Google Checkout lags far behind market leader PayPal, a subsidiary of EBay (EBAY). PayPal has been one of the huge bright spots for its parent company. But Google Checkout may be ramping up. Google's investment in social games giant Zynga likely presages a replacement of PayPal with Google's payment system in Zynga's games. And the rise of mobile commerce twinned with the rapid growth of Google's Android operating system (which of course integrates Google Checkout) could further help fuel growth in the PayPal competitor.

On a personal and anecdotal level, I've been encountering Checkout far more often lately when making Web purchases, in particular on the fast-growing group-buying sites such as BloomSpot. (Others use PayPal, and many sites incorporate both.)

So what's the potential valuation here? That's much harder to peg and to me is more speculative than the other two. PayPal accounts for roughly 30% of EBay's total sales. EBay's total market capitalization is roughly $28 billion. PayPal is growing much faster than the rest of EBay, so it's safe to say that perhaps 40% of the parent's market cap could be attributed to PayPal, or about $11 billion. This is partly based on expectations of PayPal revenue hitting $4.5 billion in 2011. Unfortunately, Google hasn't released much info about Checkout, but let's give it what I think is a conservative value to Google of $3 billion. After all, Checkout is definitely No. 2 in its field already.

Tally these three nascent revenue streams, and you get to $11.5 billion in additional market cap. Of course, this could all prove to be a mirage, and Google may not be able to support or expand these businesses. But Google has done a fine job of pulling in display ads and video ads, and it's building those businesses, which are actually very different than classic search advertising. This is clearly back-of-the-envelope speculation, but useful in considering the Google's future, which for my money is far brighter than Wall Street and Silicon Valley may now understand.