Google’s announcement about the separation of its businesses has triggered a long list of price target increases with analysts repeatedly banging the Alphabet drum. However, the internet company now has an upgrade based on its valuation and growth rates rather than solely on the formation of Alphabet and the greater transparency that’s expected with it.

Google deserves higher valuation deserved

Oppenheimer analyst Jason Helfstein and his team said in their report dated Oct. 1 that they upgraded Google from Perform to Outperform and raised their price target from $670 to $700 per share, based on a sum of the parts valuation. Their new implied bull case is a whopping $905 per share.

In their base case, they’re assuming Google X, Google Fiber, and other “longer term projects” result in between $2 billion and $5 billion next year. They’re also assuming 12 times Google’s core Search EBITDA, six times YouTube revenues, 10 times DoubleClick and third-party Search, eight times Google Play EBITDA, five times hardware EBITDA and three times Nest revenue.

YouTube growth accelerating

They report that YouTube is now growing at its fastest rate in more than two years. The video streaming platform saw the amount of time spent on it rise by more than 60% year over year after accelerating in the second quarter. The platform also now has more than 1 billion users, bringing it closer to Facebook’s 1.5 billion users, becoming the third most popular app in time spent on it.

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As a result, the Oppenheimer team thinks a multiple of six times revenue, compared to Facebook’s multiple of seven times revenue, is deserved. As you can see on the graph, several of Google’s other apps rank high up on the list as well.

Another positive they see is Google’s new ad products, which they say pose serious competition for Facebook. One of the newest products is Customer Match, which is similar to Facebook’s Custom Audiences, allowing marketers to upload email addresses, which then can be matched to Search, YouTube and Gmail users. The other is Universal App Campaigns, which enables app install ads that are similar to Facebook’s App Install Adds.

Alleviating ad blocking, Search concerns

One of the newest threats to Google’s core Search business is the sudden growth of ad blocking software, although Oppenheimer analysts agree with pretty much all of the other firms in seeing this software as being not much of a threat right now. It’s unclear whether ad blocking software will be a long term problem, but in the near term, the Oppenheimer team sees just a few small implications from it.

The first is related to Google’s control of its Chrome browser and Android ecosystem. Second is “financial clout for white-listing,” and third is the shift from display ads to Search, which is more profitable. The Oppenheimer team sees potential headwinds for YouTube and DoubleClick but expect “less-intrusive, high-quality ads” like TrueView or Product Listing Ads to become the new standard in digital advertising.

Search to remain dominant

The analysts also expect Search to remain the biggest ad format through 2018, even though desktop is losing share to mobile and video advertising. However, they say total search will continue to make up most of internet ad spending, both inside and outside the U.S. They believe mobile search will see compound annual growth rates of 35% in the U.S. and 36% outside the U.S. from 2013 to 2018.

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All Graphs / charts in this article are courtesy Oppenheimer.

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