We will not be adjusting our fair value estimate, and our wide moat rating remains.
Although Google's capital-allocation and investment discipline has been opaque, at best, we have long felt that Pichette has created additional structure and discipline for the company. We expect these processes to continue, though we remain modestly cautious about this expectation, primarily because the company has rarely shared meaningful metrics to allow investors to evaluate management's discipline. In terms of our thesis, the company's core assets including Search, Maps, Email, Mobile (Android and Google Play), and Advertising Technology support the company's wide moat. Furthermore, we believe management is motivated, over the long term, to maximize shareholder return, as there is substantial founder and employee wealth (and income) tied to Google's stock price.
Investment thesis (27.1.2015)
With a dominant Internet search product as its foundation, Google has built an impressive portfolio that individuals use frequently, beyond search. These new products allow advertisers to reach out to potential customers multiple times, in multiple ways.
As consumers use multiple devices in a post-PC world, these changing behaviors shine a light on other successful products Google has built in order to keep a hold on users and provide a greater benefit to advertisers. Google's mobile operating system and browser help to unify users' experience as they move from one device to another. The firm's success in products such as Gmail, the Chrome browser, and Google Maps provides a cohesive experience for users and helps Google show more relevant ads.
Our general thesis for the online media sector assumes that digital ad spending will continue to consolidate around companies with unique assets and reach, such as Google and Facebook. A strong secular growth trend for online advertising is core to our thesis. The market for Internet search advertising is still growing in the double digits, while display advertising is growing thanks to newer innovations tying display ads to specific actions, including clicks, leads, and customers. Faster-growing geographies such as Asia are propping up overall growth rates even as pockets of economic weakness hit various regions.
As the pre-eminent leader in search, Google maintains more than 60% of worldwide market share; no other competitor has even 10%. We believe the company's early technical advantages attracted users who now use it habitually, creating a switching cost based on familiarity with the engine. Although we expect small movements in market share, we believe Google's dominance will persist and not lose more than 3-5 points of share.
Investors should be aware that new businesses and products are unlikely to be as profitable as the desktop search market. As Google will be forced to share payments with other players in the value chain, such as content owners, application developers, and handset makers, profit growth may ultimately lag revenue growth over the long run.
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