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in search and has gobbled up market share in recent years, from 61% in 2007 to 68% in 2010, mainly at Yahoo!'s expense. Yahoo!'s share fell from 14% to 6.4% in the same time period.

We estimate that Google's Search business accounts for 71% of the $632 Trefis price estimate for Google's stock, which is about 7% above the current market price.

Below we look at potential upside and downside scenarios for Google that focus on two important drivers to its share price: market share and traffic acquisition costs.

Scenario 1: 10% Downside - Market Share Loss

Microsoft has started to aggressively tap into the search market, and Bing is expected to increase its share from 2.9% in 2008 to an expected 3.3% in 2010. In the U.S., Bing has an estimated share of around 13% for 2010.

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Microsoft has partnered with Yahoo! and Facebook in efforts to provide better search capabilities. Its deal with Yahoo! is a 10-year contract that gives Microsoft access to all Yahoo! searches. This enables Bing to yield better search results and offer a more robust alternative to Google

Facebook makes searches more personalized. For example, when a user is searching for a movie on Bing, he sees results that include how many Facebook friends "liked" the movie. Such results can extend to news articles, books, restaurants, music and a variety of other products.This partnership can provide Bing with an advantage over Google if the feature is well received by users and leads to greater use of Bing at the expense of Google.

There could be a downside of 10% to the Trefis price estimate if Google's market share declines to 2007 levels of 61%.

Scenario 2: 5% Upside From Higher Profit Margins on Lower TAC

We currently forecast Google Search EBITDA margin to increase from about 49% in 2010 to nearly 53% by the end of the Trefis forecast period.

Google's main operating cost component is the traffic acquisition cost (TAC). The TAC as a % of revenues has gone down for the past few years (from 30% in 2007 to 27% in 2009). This most likely comes from Google having more negotiating leverage with network sites.

Google pays network sites for search results in order to gain more traffic, and given Google's size, it can secure better pricing arrangements than in the past and lower its cost for new traffic.

If Google can further control this cost component, its margins could increase noticeably. If its margins rise to 57% by the end of Trefis forecast period, this adds 5% to our price estimates.

You can see the complete $632 Trefis Price estimate for Google stock



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