Online advertising business model

I am not a financial analyst, I don’t play one on TV and neither did I stay in Holiday inn express last night but I would like to ponder on the valuation of a certain business model. There is so much clamoring for a piece of the advertising pie that I decided to check out what this hoopla I all about. I am not claiming that all these #s are totally accurate. They are back of the envelope calculations at best and take it for what its worth ( close to nothing ).

WW total spend on Advertising ( online + print+ media+ hoardings + etc ) = $500 Billion
Online advertising today = ( less than ) $20 Bil
This segment is projected to grow immensely
Say in 5 years Online advertising = ( less than ) $100 Bil ( 20% of overall advertising ) – BEST case

Google market share today is about 30 % - lets say it grown in the best case to about 40% which will put their share to 40 Billion

Margins in content publishing business will reach an equilibrium of 20% - even at a high end say it is at 30% -> GOOG’s margin is 12 Bil
For arguments sake, I am going to assume that google doesn’t really get much traction on other revenue streams other than advertising ( search, placement, display etc )

Let’s take an earnings multiple of 15-20X considering the risk, potential upside outside of this core business etc -> 180- 240Bil market cap – today GOOG’s market cap was 138 – some room for growth huh?


Supporting evidence

I know that you are itching to ask me why I took an revenue multiple and not an earnings multiple- the answer is that I think the earnings ( driven largely by the margins ) are going to wildly fluctuate in the next few years before it reaches an equilibrium. Of 20%. It might even increase in the short run before it starts coming down.

Developed markets have about 95% share of the WW spend on advertising. This is not bound to change much in the next few years but even if you think about 5% of a 100 billion market it is not bad - huh ? In the Indian market, there are an estimated 38 Million users of the internet who go to Indian websites like yahoo.co.in or msn.co.in and other local websites. Though the user base looks ripe to explode, the advertising spend still lags and will be on ramp for another few years. the opportunity is there - who will capitalzine on it ?