Google Can Go to $1,000

 | May 22, 2013 | 2:00 PM EDT
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Over the past six months, shares of our Best Ideas Newsletter portfolio holding Google (GOOG) have performed exceptionally well, increasing by more than 40% to just over $900 per share compared with a 22% gain for the Nasdaq over the same period. Given the tremendous fundamentals of Google's core search business, continued mobile monetization and a stable of potentially blockbuster products, we continue to believe in the shares and see an upside north of $1,000.

The main driver of our fair value estimate remains Google's advertising business. The core search business saw paid clicks rise 20% year-over-year during the most recent quarter, driving Google's site revenue 18% higher to $8.6 billion. Demand for online advertising shows no sign of slowing, but more importantly, Google has successfully navigated the shift to mobile thanks to both large Android adoption and strong brand recognition on other operating systems (such as iOS). At least in the U.S., we see little competition on either the desktop or mobile space, though perhaps further integration of Siri on the next iteration of Apple's (AAPL) iPhone could take some market share. Nevertheless, Google's competitive position looks as strong as ever, especially as its Chrome browser recently eclipsed 750 million users.

Another incremental positive could be charging for subscriber channels on YouTube. People watch a lot of content on YouTube -- approximately 6 billion hours monthly -- and we suspect the company will find plenty of users that will pay for content. Currently, the channels cost just $0.99 per month per channel and could be an attractive proposition to the growing number of "cord cutters" who are giving up cable subscriptions in younger generations. Perhaps YouTube could become a content hub more akin to cable companies in the future.

Without question, search and display advertising remains Google's best business and primary source of free cash flow. Although we like the existing business, additional upside could lie in Google's product pipeline. Not everything will be a hit; in fact, Google+ is hardly the Facebook (FB) competitor some had imagined. We're actually comfortable with Google creating products and services that flop as long as the company keeps trying. Gmail is among the dominant email services, but it started out as just a bolt-on addition to the core search. We're keeping a positive, open mind on its future efforts at innovation.

Currently, the company is adding a product that allows payments to be sent through Gmail, which could take a small amount of share from eBay's (EBAY) PayPal in payment transfers, but we doubt it will be a game changer. We're still huge fans of eBay. Google also announced the launch of a $9.99 per month "All Access" music service to compete with Pandora (P) and Spotify. Again, this might not be a game-changer, but it could be just enough to weaken competitors and help the company gain share through its established base of Android users.

Still, these possible developments might not come close to living up to the potential of self-driving cars or Google Glass. Met with significant skepticism, we believe self-driving cars could eventually become a staple in the U.S. as companies look for additional ways to boost productivity. Not only would this usher in a new cultural phenomenon, but it would likely usher in a huge revenue source for Google.

As for Google Glass, we remain optimistic about its uses across several professional fields, though we are skeptical it will ever become a serious threat or compliment to the smartphone (given its current price and appearance). Even if it is relegated to the professional world, Google Glass could become another enormous source of revenue.

Ultimately, we still love Google's core businesses and the company's potential not only to expand into new markets but to create new markets. In this sense, Google reminds us of Apple, another one of our favorite companies during the last few years. While we're not jumping to put fresh money to work in Google at this time, we believe further upside exists.

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