I can never stop marveling at the tremendous growth that Google (NASDAQ:GOOG) has managed to achieve over the past one year. For the past twelve months, the internet search giant has been ambitiously expanding its mobile and overseas business while at the same time keeping in check the declining ad-rates sending the company shares to record highs. For the past three months, Google has been trading slightly above $1000 ($1032 as of Nov. 13, 2013), something that has definitely got its investors excited especially if you purchased the stock in 2004 when it was worth around $100 or last year June when it was trading for $560.
However, in as much as the stock is growing at such an impressive pace, it could be exposed to the risk of high investor expectation. Meaning, I think that there could be a possibility of a tumble in the success that the stock has achieved so far. Don't get me wrong, Google is nowhere near BlackBerry (NASDAQ:BBRY) and if the stock was to rollback, it won't be similar to Apple's (NASDAQ:AAPL) flop a year ago, at least that is what I think.
Challenges Posed By Industry Trends
In reference to Google's third-quarter results and away from the fact that the tech giant managed to achieve a 36% jump in earnings, it is hard to ignore the slump in ad prices. For a company like Google, this could be viewed as a short-term drag to its growth momentum but with serious long-term effect if not checked. Mind you, the average price per ad charged by Google has been on the decline in the recent quarters, signaling what I can term as a revolution in the search engine business
One thing that continues to depress the Google's cost-per-click prices is the growth of the mobile device industry or specifically the current surge in mobile-search activity, which by the way is growing faster than advertisers can keep up, creating an overabundance in market supply. Going by the law of demand, excessive supply of a commodity means that prices go down and this is what Google is facing at the moment. In Google's defense, this problem is hardly specific to the company as web publishers from both AOL (NYSE:AOL) and Yahoo (NASDAQ:YHOO) are also facing a similar decline in online advertising rates.
However, don't make a mistake that the trouble facing the advertising space currently can be washed away with the seemingly upward trend of Google. In fact, now that the stock is gaining, there isn't a lot of space for error in my view.
The AdSense Question
The future of the $12.7 billion AdSense businesses is still in question. Referring back to the recent financial reports from Google, the AdSense network, which was responsible for about 29% of the last fiscal year's $43.7 billion in revenues, showed no growth. Of course, this is in comparison to the 22% yearly growth for its counterpart, AdWords. Furthermore, proceeds from the network have been on the decline in the last three years leaving the future of the AdSense network in doubt and perhaps Google's future growth in question considering the importance of the network to the company.
The AdSense network has been vital to Google's growth and its importance was witnessed back in 2004 during the company's IPO. Mind you, at that time the stock market was skittish to the idea of investing in tech companies with volatile revenues. In fact, it was the success of the Google IPO that sparked a new interest in tech stocks. With that in mind, could the shrink in AdSense network be a reflection of deeper issues in the advertising space? I find that not hard to deny and it might be a serious problem for Google in the future.
Can Google Still Grow?
Continued growth of the stock is widely expected. However, broader challenges like the ones mentioned are expected to slow down the growth momentum. To bolster further growth, Google is looking beyond its advertising business, different avenues such as;
1. Google Glass that is aimed at increasing workers' efficiency and is expected to add at least $ 1 billion per year to the company's profit since 2017, that is according to this report from CNN.
However, novelty products like the Google Glass are definitely not proven moneymakers at least for now. In addition, some projects like the ambitious fiber optic connectivity plans could be considered as a big drag on Google's short term profitability.
The Bottom Line
I still believe that Google stock might as well come out much higher than the current share price of $1000. This is of course if the current investments pay off in the future. However, as much as investors continue to exude hope that the stock will diversify its revenue stream and continue being a dominant market player like it is currently, they also need to be realistic about the short-term challenges that the company is facing. Currently, Google's core business is struggling and revenue growth is growing at a much faster pace than profits. Of course, dumping the stock at the current market price will be ridiculous, just saying, but it might be prudent of any investor to take some partial profits as they come while at the same time rebalancing.
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.