Evercore Equity Research analysts Andrew McNellis and Ken Sena maintain overweight ratings for Google Inc (NASDAQ:GOOG).

Google Play

Analysts published this note in conjunction with a co-report with Evercore Hardware Analyst Rob Cihra (Monetizing the Thin-Client Candy Store: Opportunities to Leverage Apple Apps and Google Play), where analysts examine the current App Store ecosystem, examine unit economics, and assess the players.

Google Play leading in downloads

Analysts estimate nearly 65B Android app downloads in 2014, more than double Apple Inc. (NASDAQ:AAPL)’s 29B after being just tied two years ago, and growing to 85B in 2015. In addition, when combined with Google Inc (NASDAQ:GOOG)’s core capabilities and new innovations (e.g., Chromecast), analysts see this leading to other rev opportunities, such as Vodafone Group Plc (ADR) (NASDAQ:VOD) (LON:VOD), content subscriptions, and more.

Play solidifies an Android-based marketplace

Google Play gives Google Inc (NASDAQ:GOOG) control over Android-based commerce, charging a 30% cut with the remainder going to the publisher. While the 30% cut largely resides currently with Android OEM and carrier partners, analysts at the research firm see this trend beginning to move in Google’s favor as strong overall Play traction continues.

Samsung likely to remain wild card

While Android has more than 50% of the thin-client market, Google Inc (NASDAQ:GOOG) has just ~12% of Android’s hardware (through Motorola, Nexus, etc.). In addition, Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), with its 40% share of Android hardware, currently offers its own separate app store alongside Google Play with a separate set of SDKs, an AdHub, In-App Purchasing, and a Wallet API. Therefore, the Google-Samsung power balance may stay in limbo for some time. Nevertheless, barring Samsung, analysts see Google’s leverage improving with Android ecosystem participants and having a positive contribution on performance.

Potential for Google Play margin expansion

Analysts see the potential for gross margins on Google Play to expand from a low-single digit percent currently to about 25% by 2015 (net of the portion to carriers and OEMs). On firm’s 2015 estimate for $3.4B in net Play revenue, or 6% of core net revenue (vs. 3% today), this implies a 3% boost to EBITDA. Evercore’s estimate assumes that Samsung continues to sell about half of Android devices while retaining the vast majority of Play economics. Meanwhile, analysts see Google Inc (NASDAQ:GOOG) negotiating a more equitable split with its other partners

Google’s overweight ratings maintained

Google Inc (NASDAQ:GOOG)’s ability to monetize services allows it to disrupt many hardware and software layers, and current traction within Google Play only helps support this view. In addition, analysts see such efforts as ultimately contributing to a stronger platform ecosystem in which more collected data, better predictive analytics, and a single view of the user across many screens will lead to better overall economics in Search and other areas. Evercore’s new $1,250 target (up from $1,100) implies Google can trade at 18.6x 2015 earnings (x-SBE), a slight premium to analysts’ expectation for 17% growth through 2018.