In spite of the surge in price of Google Inc (NASDAQ:GOOG) shares since the beginning of the month, Bernstein Research analysts believe they are still greatly undervalued. In fact, they say the company’s current share price implies “unrealistically bearish expectations on the evolution of the business.”

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Why Google’s search ad revenue is worth more

Analyst Carlos Kirjner issued a report to investors this week. He doesn’t believe Google’s share price price gives the search giant any credit for the upside he sees from the numerous options the company has to build new businesses worth billions of dollars. He notes that one of the most important drivers for value in Google is search advertising revenues, which he believes makes up more than 60 percent of the company’s core revenues. He also estimates that search advertising revenues make up more than 80 percent of Google Inc (NASDAQ:GOOG)’s core gross profits and an even bigger part of its operating income.

The analyst estimates that search advertising revenues grew about 18 percent year over year during the second quarter on an F / X-neutral basis. He believes it’s impossible to estimate the long-term growth rate of this type of revenue meaningfully using a bottom-up approach. According to Kirjner, it’s because the growth of future search revenue depends on what advertisers perceive as their return on investment. He said this is just uncertain and too difficult to estimate.

How fast will search advertising grow?

He also believes that even though the growth rate is uncertain, Google Inc (NASDAQ:GOOG)’s current share price implies that search revenues will not grow as quickly as global advertising revenues over the next five years. He said it also implies that growth in the Google Network and YouTube decelerate dramatically and doesn’t provide the search giant with credit for new businesses and initiatives.

The analyst estimates that overall advertising, including both on and offline, will grow about 6 percent toward the end of the current decade. He said even assuming zero to limited upside to YouTube and Google’s Ad Exchange and Network, the current share price corresponds to a rapid growth rate decline of search revenues. That would be below the growth rate of overall advertising spending.

He also believes Google Inc (NASDAQ:GOOG) could develop plenty of new business opportunities over the next few years, particularly because of its control over Android, Chrome and a number of key apps like search, maps, YouTube and others.

Google’s long-term risks overestimated?

According to Kirjner, Google’s current share price also overestimates the long-term risks faced by the company, like the believe that search may become obsolete. Instead, he sees plenty of space for improvement of search, which would, in the worst case scenario, cause search ad revenues to decline gradually over the next few years. He also sees potential in YouTube and the businesses currently reported under “Other Revenues,” which include Google Compute Engine and Google Fiber. He believes these businesses could become profitable multibillion dollar businesses on their own.

He believes that as investors realize that the company’s risks have been overestimated, the stock will once again be rerated upwards. He said it will happen in a similar fashion to how it was when they realized that the threat from mobile TAC payments and other mobile monetization issues were exaggerated. As a result, he believes that Google shares will appreciate even further in the first half of next year thanks to continued double digit growth in Google Sites revenues and the return of teens-range operating income growth.

The analyst continues to rate Google Inc (NASDAQ:GOOG) as Outperform with a 12-month price target of $1,000 per share.

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