- Google reported solid revenue growth, but its earnings were way off the mark last quarter.
- Google is suffering from a decline in cost-per-clicks, and Facebook seems to be doing better in mobile.
- Google, however, is taking steps to improve its performance, but it remains to be seen if it can overcome Facebook.
Google (NASDAQ:GOOG) (NASDAQ:GOOGL) has done slightly better than the NASDAQ Composite index so far this year, but considering its recent second-quarter results, there's a possibility that it might accelerate from now on. However, there are certain concerns. Although Google reported a terrific 22% increase in revenue, it is seeing a decline in cost-per-clicks, and it missed the earnings estimate by a wide margin.
Moreover, as competition from Facebook (NASDAQ:FB) is rising in the ad space, it might be difficult for Google to continue growing at this pace. Let's see what lies in store for Google and whether it will be able to sustain its momentum going forward.
Finding it difficult to crack mobile
As mentioned above, Google is finding it difficult to gain traction in mobile. It isn't being able to monetize mobile properly. As The New York Times reports:
"Thursday's earnings release for the second quarter, which ended in June, provided more evidence of this problem. The price that advertisers pay each time someone clicks on an ad - or "cost per click," in Google talk - dropped 6% from the year-ago quarter, largely because of the shift to increased mobile advertising. That is in line with Google's two-year trend of declining ad prices. Google does not, however, break out mobile ad revenue from desktop ad revenue."
At the same time, The New York Times goes on to say that Facebook is doing well in mobile advertising. The article states:
"Mobile, however, is something that Facebook seems to have cracked. The social media giant accounted for almost 16% of mobile advertising dollars spent around the world last year, eMarketer estimates, up from 9% in 2012. Google dropped to a 41.5% share of the mobile ad market last year, down from 49.8% in 2012.
Google spent the first half of 2014 making one pie-in-the-sky acquisition after another. The company is spending billions to move into new industries that are unlikely to yield profits for decades."
Moreover, Facebook is expected to overtake Google in the display ads space this year, according to eMarketer. adexchanger.com reports:
"Most noticeably, Facebook, which for the first time last quarter served more ad impressions on mobile devices than on the desktop, experienced a 50.5% increase in US digital display ad revenue last year to Google's 33.3% growth rate, according to eMarketer.
If eMarketer's estimations are accurate, Facebook has already pulled ahead of Google in US display ad spend. Although Facebook was nipping at Google's heels in 2012, totaling $2.18 billion in display ad revenues to Google's $2.26 billion, the social platform pulled ahead of the search giant last year totaling $3.28 billion in display ad revenue to Google's $3 billion.
Fast forward to the end of this year and Facebook is expected to reach some $4.8 billion in digital display revenues to Google's $4 billion. This is a markedly higher estimation than one year ago, when eMarketer forecasted Facebook would generate $3.35 billion in digital display ad revenues by the end of 2014."
As such, Google's performance might take a hit in the future. However, the company is making aggressive moves to improve the business. It is trying to widen its ecosystem by launching more products.
Google recently unveiled Android L. The search giant is also focused on expanding its Android platform to cars, watches, and TVs, coupled with making it simpler to search Google from anywhere. Overall, there are four areas driving Google's business. First, performance or direct response marketing, second, assisting clients in building their brands, third, the ad tech platform of Google for agencies and publishers, and fourth, the emerging businesses of Google viz. digital content, enterprise, and hardware.
Google is making investments in performance advertising to serve small businesses. It is trying to capitalize on the tremendous opportunity in mobile, and the fact that it has been building popular mobile app formats for years might help it in this regard going forward. Management is focused on making ad campaigns easier across screens, and assisting businesses measure their effectiveness across devices as well as offline.
In addition, Google has launched improvements such as app deep linking and search to help developers deeply engage users who have already downloaded its app. It is providing exclusive targeting options in AdMob to help most likely customers, a new app install format on YouTube, and more powerful measurement tools to allow them to know exactly how their app is performing at every stage.
There's also increasing momentum in the retailer segments and product listing ads across screens. During the second quarter, Google sent more than thrice the traffic to merchants on smartphones and tablet devices as compared to the first quarter of last year.
The company is also focusing on video to drive more ad revenue. Google is experiencing very healthy traffic at YouTube, driven by popular channels. The company launched its Google Preferred Video offering at BrandCast in April, which allows marketers access to top content at YouTube, and is receiving strong support from agencies and brands as of now.
Driving revenue through partnerships
Digitas and Omnicom Media Group have signed on with Google. Brands like General Motors (NYSE:GM), Coca-Cola (NYSE:KO), and Universal Pictures are reaping the benefits of Google Preferred. Adidas (OTCQX:ADDYY) utilized Google's global platform to reach fans during the FIFA World Cup. It engaged soccer fans by live streaming events with athletes, promoted them on YouTube through TrueView ads, in addition to using beautiful light box ads across the display network of Google.
Google introduced a premium programmatic video marketplace called Google Partner Select last month for helping publishers monetize their video content, and to assist agencies in reaching top quality video content across the Web.
So, it is clear that Google is trying to make a number of moves to improve the business. However, it does face some substantial challenges as mentioned earlier. As such, it would be wise for investors to stay away from Google for the time being, and instead consider Facebook for their portfolios as it is expected to grow at a faster pace. In addition, Facebook is strengthening its position in mobile and it has a strong user base, and this is another reason why it looks like a better investment.