#114: Did we nail it?
How the market reacted to Google Network valuation.
On April 17, U.S. District Judge Leonie Brinkema ruled that Google violated antitrust laws by monopolizing a purportedly “key” segment of the digital advertising market known as open web display ads (also known as rectangular boxes on websites).
Let’s tackle the term “key segment” of the digital ad market head-on. We’re talking about just 8% of the global ad market (and shrinking) and ~11% of the digital ad market (search, social, retail media, and open web). We’re not sure what constitutes “key,” but sub-10% market share seems to be a low hurdle.
In essence, the court somehow found that Google willfully acquired and maintained monopoly power in two critical areas of the online advertising ecosystem:
Publisher ad server, Google’s DoubleClick for Publishers (DFP)
Connecting its ad exchange, known as AdX, to DFP
While much of the adtech ecosystem is popping cheap champagne and giddy with happiness, the hangover might not end up being worth the premature celebration.
Think about this way: When Google offered publishers a free ad server in exchange for demand, it’s not like publishers did not have other ad server options. Instead, they took the easy button approach, mostly out of laziness and short-term thinking, and for whatever reason, they believed what they were trading off was not worth much. They forgot the wise words of Milton Friedman:
“There ain't no such thing as a free lunch.”
In all the celebration, the big what-if folks are not considering is: What if DFP + AdX is/was the glue holding together the open web adtech market? In other words, the alternative might be much worse. Time will tell.
A partial win for Google
While the court ruled against Google on its DFP-AdX tie-up, it dismissed claims that Google held a monopoly in advertiser ad networks, citing insufficient evidence from the plaintiffs.
The market share waterfall chart above shows why Judge Brinkema ruled the way she did. Clearly, the digital ad space is very competitive, and advertisers have many choices. And around 11% of the time, they allocate funds to rectangular ads on the open web.
Did we nail it?
On March 18, Quo Vadis posted a working paper titled “On Normative Economics and Google's Game Moves." The paper estimated the value of Google’s Network business (DFP, AdX, and DV360) using a sum-of-parts approach from the perspective of outside buyers and also from Google’s perspective.
Sum-of-parts valuation to an outside buyer
On a discounted economic profit basis (aka “pure free cash flow), our fair market value for Google’s Network (Publisher Ad Server, AdX supply-side platform, and DV360 demand-side platform) businesses is worth roughly $13 billion to outside buyers.
Sum-of-parts valuation for Google
Google would very likely value its Network businesses more than outside buyers given its ability to extract higher take rates into net revenue at a lower marginal cost (e.g. lower internal cloud costs) as well as its ability to squeeze more operating margin out of each business, given its scale and back office fixed cost advantages. After considering how Google might interpret the key value drivers, we estimated the Network business to be worth around $39 billion.
What did the market say on April 17?
Let’s start with the NASDAQ. On April 17, it opened at $16,400 and closed down a hair at $16,286, down –0.69%.
Google opened at $156.61 and closed down $153.36, down –2.08% or $3.25/share. Overall, investors seemed to value Google’s Network business exactly at $39 billion ($3.25/share x 12 billion common shares outstanding).
If we attribute the NASDAQ’s 0.69% drop to broad systematic risk driven by overall market conditions, then the remaining decline—an additional 1.38% in Google's stock—can be seen as unsystematic risk, reflecting company-specific investor reaction to the DOJ’s ruling. That translates to a $25 billion hit to Google's market value in a single day. Either way, our March 18 valuation is pretty darn close to what the wisdom of crowds thinks.
What about The Trade Desk?
On April 17, The Trade Desk opened at $48.32 and closed at $50.26, marking a 4% gain and adding nearly $1 billion in market cap. Given that TTD trades at roughly 2x gross ad spend ($12 billion in FY24), investors appear to be pricing in about $500 million in incremental spend shifting its way due to the DOJ’s ruling against Google. It’s a positive signal—but not the major market shift many had anticipated.
Google wins in the end?
One of the more striking aspects of adtech is how myopically practitioners often view the broader advertising landscape. In reality, the advertising ecosystem is massive, with over $1 trillion flowing through media and creative budgets alone. Factor in trade marketing budgets, which are shifting from physical retail to the digital commerce media world, and the total approaches $2 trillion.
The open web, where adtech lives, is just a tiny portion (3.5%) of the overall pie and highly dependent on what Quo Vadis calls a “Funky Town” incentive that might not persist in its current form for much longer.
Adtech folks would be best served by understanding why Google does what it does when it invents a better mousetrap and how it thinks about shareholder returns.
Google is one of the very best allocators of investor capital in search of future returns. Meta and Amazon are also off-the-charts good are generating returns on invested capital (ROIC) above their cost of capital. That’s all that matters.
So, if you’re trying to anticipate Google’s next move in this game of 3D chess, the best guidance from Quo Vadis is this: think in terms of how your decision today best maximizes future ROIC for your shareholders. That’s what Google does because that is what their investors expect them to do.
Disclaimer: This post, and any other post from Quo Vadis, should not be considered investment advice. This content is for informational purposes only. You should not construe this information, or any other material from Quo Vadis, as investment, financial, or any other form of advice.