Can Google Enhance Its Advertising Rates?

| About: Alphabet Inc. (GOOG)

Google Inc. (NASDAQ:GOOG) operates a search engine website and owns the rights to the Android mobile operating system. The company has a market cap of $297 billion and a stock price of around $890.

With 900 million unique monthly users, Google is far and away the most popular internet search engine provider. The next closest search engine providers are Bing which is owned by the Microsoft Corporation (NASDAQ:MSFT) with 165 million unique monthly users, and Yahoo (NASDAQ:YHOO) which has 160 million unique monthly users.

Google's position as the #1 search engine provider has made it possible for the company to consistently grow earnings. Over the last five years, it has increased its revenues by an average of 26% per year and its net income by an average of 31% per year. In the second quarter, the company's year over year revenues were up 19% to $14.1 billion. The net income increased by 16% to $3.23 billion. Even though Google' earnings increased investors were not impressed because all but $1 billion of its revenues came from advertising, and their advertising rates declined.

Google's earnings looking forward

Despite Google's strong history of growing revenues, it is generally acknowledged that it needs to diversify its income stream. The company now has a number of up and coming projects that could help it to diversify and improve its income stream, and three of them look quite interesting. Its three most promising initiatives are its Enhanced Campaigns initiative, its Motorola Mobility offerings, and its driverless car project.

The Enhanced Campaign was designed to help Google increase its sagging advertising rates. In the past quarter, the number of clicks on Google websites was up 23%, but the cost per click was down by 6%. Advertising rates decreased because marketers were unwilling to pay the higher desktop advertising rates for ads that were run on mobile computing devices. Recently Google's CFO Patrick Pichette acknowledged the problem that increased mobile use has caused and said "Clearly mobile has had an impact." In order to overcome the lower mobile advertising rates, Google began its Enhanced Campaign project which will force marketers to buy advertising for mobile computers and desktop computers in one package. During the second quarter earnings call despite lower advertising rates Google's CEO Larry Page reiterated his support for the Enhanced Campaign initiative saying "It's the very early stages of a major change."

A second project that Google executives believe will help to diversify the company's earnings is its Motorola Mobility unit. The unit was purchased for $12.5 billion in 2011 and has been losing money ever since. Critics have wondered why Google ever made the purchase. The unit has been bleeding cash, since it was purchased in 2011 and in the second quarter it had an operating loss of $342 million. However now that the full benefits of the purchase have finally become clear, buying Motorola Mobility looks to be a smart move. In April of 2013, the company was awarded $1.7 billion in a patent lawsuit against the Microsoft Corporation. The company received another $2.35 billion from the sale of Motorola's set top box business. Finally, the company will realize approximately $6.5 billion in tax benefits, as a result Motorola Mobility's net operating losses. When these gains are added up Google, is left with the Motorola handset unit and its many patents for a cost of $1.5 billion.

Google began selling its Moto-X smartphones in August. The Moto-X is Google's answer to Apple's (NASDAQ:AAPL) iPhone and Samsung's Galaxy smartphones. It is the first high end smartphone that Google has released since acquiring Motorola Mobility. The phone is now on sale at all four of the major U. S. carriers Verizon (NYSE:VZ) AT&T (NYSE:T) Sprint Nextel and T-Mobile. The phone is powered by a standard Android operating system, and what makes it unique is its array of voice activated functions. For instance the phone allows access to its Google search engine App by simply saying "Okay, Google Now." Dennis Woodside Motorola's CEO said, "Google now is a high-speed on-ramp to all that great stuff that Google is building." Motorola has plans to spend up to $500 million to market the Moto X. Motorola has other high tech smartphones, and smartwatches that are in the late stages of development, and it is hoped that these devices will make Motorola a relevant player in the mobile device marketplace.

A third product that Google is developing is its driverless automobile. In July, it was announced that Uber would purchase 2,500 of Google's driverless cars and invest $375 million for a fleet of Google's third generation GX3200 automobiles. While it is unlikely that we will be seeing a large number of GX3200's on the street anytime soon, this is an important step forward.


Over the last two months Google's stock price has fallen 4%. I believe that the company's stock price will correct by as much as 10% before its next earnings report on October 14. What Google needs in order to improve its stock price, is to show that one or more of its new initiatives is working. If the third quarter earnings report shows positive results from either the Enhanced Campaign program or the Motorola Mobility unit Google's stock price will move higher. However I would not recommend buying this stock until after the third quarter earnings report.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by an Analyst at ResearchCows, ResearchCows is not receiving compensation for it (other than from Seeking Alpha). ResearchCows has no business relationship with any company whose stock is mentioned in this article. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the company's SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.