It is well known by readers of this blog that I am generally bullish on Google. It has so much power in this new era thanks to its dominant position on the internet. Think about it for a few minutes… over half of the world’s internet users start their internet journey with a search through Google’s search engine. That gives it immense power in many different ways.
1-Advertising space
No doubt, Google has the premium space for advertisers. Where else can a company like GM expose itself to users who are thinking of “Best SUV”, and only those users? As technology has became more powerful, companies are now able to setup websites and offers targeted exactly to users that type a given keyword. Of course, this makes the user happy as they have an offer that is generally customized towards what they were looking for. But it is even better for advertisers. For years, they had been spending for spots on TV, radio and the print media among other places. Of course, that did have benefits but they were not as easy to quantify. Nowadays, Google can help you spend your advertising dollars but also track that saw your ad, who clicked and what they did next on your website. Did they join your mailing list? Buy your product? The possibilities are endless and it makes Google a perfect target for advertising dollars. This has led to an explosion of ad growth and continued growth thanks to happy advertisers and satisfied users.
2-Knowledge
This has been overlooked but thanks to search engines queries, email, its mobile services and all of its other products, Google has been able to get incredible knowledge of what users are doing, where they are, what they are thinking about and even how they are feeling. The company is still learning how to best use this data (and likely will continue to do so for many years still) but even now it is able to launch products that it knows its users are looking for. Small things such as tracking your flight departure time are now easier to do on Google as the company noticed what users were looking for. My bet is that this will be a game changer in an increasing way over the next decade or so.
3-Boosting its own products
Searching for a smart phone on Google? Don’t be surprised if you end up going to a website promoting Nexus One. And you might end up on Google Finance if you look for stock quotes. Google would be quick to object that they are not manipulating search results to favour their own. No matter if you believe them or not, you could certainly argue that the guys promoting a Google service probably have more information about ranking better on the powerful search engine than most (or perhaps any other) competitors. Being the start of a journey on the web means you have at least some influence in sending users in a direction or another and that is an amazing advantage.
Revenue distribution
All of that being said. What inspired this article is actually a very impressive graph published on BusinessInsider which breaks down Google’s revenues by area. You can draw many things from the chart but probably the most stunning part about it is how Google remains a one trick pony in the fact that almost all of its revenues come from one area; the search result ads.
Does that worry me? No. I was surprised but after thinking about it, it’s not a shocker. In most of Google’s activities, it is still more focused on gaining market share than selling products or ads. Think of Google Earth, a product that is being used increasingly by both consumers and the media. Google continues to offer free use through all kinds of different Medias without even putting many advertisements on it. Will that change in the future? Probably. But I think it’s refreshing to see a company focused on its long term profits (probably more dependant on its number of users than anything else) than a company dedicated to boosting short term earnings at any price.
Threats (Bing, Social)
That being said, there are some threats to Google that should be considered when thinking about buying the stock. I would not consider threats to products such as Google Docs or other smaller products right now because those are not significant revenue contributors right now so any change no matter how big, would likely have little to no effect on Google’s stock. So in my opinion, threats are two fold:
-Search engine competition: Right now, the only threat even worth mentioning is Microsoft’s Bing. It is gaining some ground although it is spending a lot of cash to do so. It is unclear for now if Google should be worried and I will certainly monitor the situation. But currently, I would not consider it a threat as Google’s market share has not suffered and it is unlikely that even Microsoft can keep up this level of spending for long enough. Opponent? Yes. But not a threat for now.
-Change in web use: This has been discussed and has certainly been a source of many worries at Google. There is a threat that users could start using the web in a different way using social web sites such as Facebook and Twitter as their start point instead of search engines such as Google. This has probably been the cause of recent mis-launches such as the one for Google Buzz or Google Wave. There continues to be chatter that Google wants to buy Twitter and that would certainly be of huge help to this threat. Will it happen? Difficult to say but I would hope to see Google get more involved very soon.
GOOG direction…Future growth?
But the main reason why I am still a believer in Google’s stock is that I think there will continue to be an important shift for advertisers from traditional media to the internet and a major portion of that money will go through Google’s hands no matter how it ends up being spent. Google remains the king of the web and has such an influence that it is difficult to imagine this changing anytime soon. Will it grow at 50% per year like some smaller competitors such as Baidu are doing? No, I don’t think so. But I do expect Google to show stronger growth in the next 2-3 years which warrants a much higher price for its stock.
And you are you bullish regarding Google?
Here we are again looking for a new trade to execute and while taking a look at my stock screener, it now looks like the right time to go short on Valueclick, one of the more important online advertising companies. The major problem with Valueclick is that its technology and properties have fallen behind and are no longer on the cutting edge. Some years ago, Valueclick looked like an attractive target to major players such as Google (GOOG) and Yahoo (YHOO). But I don’t see that as being as likely right now. Valueclick’s sales have been drowning. Here is a quick summary:
While Google has been trying various different strategies to generate new revenues, Valueclick seems content on remaining still. Of course, that is not good enough. With diminishing sales, there are few ways to make profits apart from cutting costs, and you can only do that to a certain extent. To give you an idea, just take a look at the Press Page on Valueclick’s page, there is nothing new in recent months. Compare that to Google which is launching almost one new product or initiative every week and you can understand why Valueclick is falling behind.
