Google's Impending Revenue Growth Promises Great Upside

| About: Alphabet Inc. (GOOG)

During the second quarter, analysts expected Google (NASDAQ:GOOG) to rake in $11.3 billion in revenue. Google however dashed these hopes after it posted sales of $11.1 billion. Interestingly, the real headline was not the missed revenues, but rather the impact that mobile had on ad prices.

Digital marketing firm Covario contends that an ad served up from a mobile search on average costs 40% less than one coming from a PC. The ongoing slip in PC shipments, paired with a coinciding sharp rise in mobile usage, has shifted ad demand away from PC, driving PC ad prices downward. As a testament to this, Google's cost per click, or the price it charges advertisers each time a user clicks an ad, has been on a steady decline for seven straight quarters. In the past second quarter, the cost per click fell 6%.

Some analysts now argue that growth may be fizzling out and that a $1000 share price is all but a pipe dream served up to overwhelmingly bullish investors. They say this because of the seemingly mellow stance that Google is taking in mitigating the decline in PC-driven ad revenue. However, against the backdrop of what passes by as complacence, Google is not only mitigating the decline in PC-driven ad revenue, but also developing far broader and deeper mobile ad revenue streams.

Ignore the milking strategy; Google will push mobile ad prices up

Milking strategy is simply a situation where short-term revenues are given priority. This is what Google is doing with PC ads. It just can't walk away because revenue in the segment is on a sure downhill journey. It has to stick it out and make as much money as it can, while it can. What's important is that investors see beyond this milking strategy.

By gaining a deeper insight, you will realize that Google is, and has been, preparing intensively to monetize on the global shift to mobile.

Unrelenting push for a personalized web

While personalization has inarguably become the new fad among internet bigwigs, Google has a clear head start relative to the competition. This is because Google laid the foundation long before its peers.

Before you can achieve personalization, you first need to enhance user engagement. After all, you can only serve personal experiences to your users if they engage with you at deeper levels, and more importantly, give out personal information. It's a give and take.

To enhance user engagement and bring the goal of personalization to greater recognition, Google set the ball rolling with Android. This operating system is not given out for free without reason. By controlling the ecosystem, as signaled by android's current 79% global market share, Google monitors interactions between users and gets users to interact at deeper levels with the internet through Google search, Gmail and other Google owned tools.

Another initiative that Google is taking to safeguard and further its interest is keeping G+ entirely ad free. This enhances user experience and yet again allows users to interact at deeper levels, circling back to Google's idea of enhancing user engagement.

Similarly, and most notably, Google recently announced that it will start pulling information from users' Gmail account, Google Calendar and G+ to serve up more personalized search results. This, paired with Google Now, which anticipates users' needs, takes the whole new idea of a personalized web to greater heights.

Add the new Moto X Phone (which comes in customizable colors and allows engraving) to the equation, and you will see the bigger picture. Google wants to serve personal experiences in both hardware and software. More importantly, these personalized experiences will cut across mobile just as effectively as they will the PC sector

How does this address the issue of mobile monetization?

­Personalized experience = greater ad efficiency

As is, software is eating into the digital ad business. This is because advertisers are tired of shooting in the dark. Advertisers are looking for efficiency and are in fact willing to pay much more for the same. With personalization, Google will be able to efficiently target ads to mobile users.

Greater ad efficiency = more revenue

By enhancing ad efficiency in the mobile market, Google will be able to present premium inventories that advertisers will willingly pay top dollar for. Going by its presence in the mobile market, Google will certainly disrupt the market through this approach.

When will all the stock price reflect this bubbling potential?

As an investor, the most important thing is timing. When will Wall Street see the opportunity? Because when it does, there is no catching that ship.

Once mobile takes firm dominance, Google's personalization efforts, the subsequent improvement in mobile ad efficiency, and the consequent increases in revenue will come to greater focus. As is, smartphone sales passed feature phone sales for the first time in the second quarter. Similarly, tablet sales are expected to pass PC sales late this year.

The timeline for the revitalization of Google's ad revenue could therefore start in early 2014 and move into fiscal 2015. As for the stock price, it will start making gains late this year.


A $950 end-year price target is feasible. Moving into fiscal 2014, the $1000 plus narrative will become a reality. Buy Google when it's still early. Its positive cash position, healthy balance sheet and huge market share will hedge against uncertainties. Once things fall in place, the stock is poised to go through the roof.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.