Google (GOOG, GOOGL) announced last Wednesday that it would start using encryption as a ranking signal. "Encrypting data transmitted over the Internet adds a barrier between Web users and anyone who wants to snoop on or steal their data," explains the Wall Street Journal. "That can help protect users even when they connect through unsecured Wi-Fi networks in airports and coffee shops, for example."
Google said in its announcement, "For now it's only a very lightweight signal-affecting fewer than 1% of global queries, and carrying less weight than other signals such as high-quality content-while we give webmasters time to switch to HTTPS. But over time, we may decide to strengthen it, because we'd like to encourage all website owners to switch from HTTP to HTTPS to keep everyone safe on the web."
Online security is a major issue. In addition to concerns over the NSA, there have been a series of high-profile hacks that left hundreds of thousands of user data and credit card numbers exposed, the most recent a ring of hackers from Russia who stole 1.2 billion passwords from some 400,000 websites. Giving bonus points to encrypted sites may help keep everyone safe on the web but it may also mean more revenue for Google.
Adding weighting to encrypted sites can help Google make users feel more secure. This in turn may help Google retain users and possibly attract new ones. More users means more advertising revenue. Ultimately, the benefits of this may be could be seen on Google's bottom line.
Encryption gives Google a competitive advantage against other search engines like Microsoft (MSFT)'s Bing. Safer Internet usage may attract more users to Google and prevent existing users from switching preferred search engine providers. Google's market share has grown marginally. In December 2013, Google had 67.3% of the US search engine market. As of the end of June 2014, that number stood at 67.6% - an increase from December but level from May. In contrast, Bing had 18.2% of the US search engine market share at the end of December 2013, moving to 19.2% at the end of June.
While Google isn't losing market share, it also isn't gaining, and the going could get even rougher for Google. In June, Apple (AAPL) announced that it would replace Google with Bing as the default search engine in its Yosemite OSX - a move that will surely mean more traffic on Bing and, by extension, a possible decrease of users on Google. A higher number of users means more ad revenue for Google.
Increased Ad Revenue
Adding a preference for encryption may mean more users and that means more revenue from ads more users also means that Google will become an even more attractive place venue for advertisers. From 2012 to 2013, Google revenues increased but not at the same rate enjoyed previously. While revenue from the company's websites increased by 20% year over year in 2013, up from 19% year over year in 2012, Google's year over year growth from network member sites slipped to 5% year over year growth in 2013 from 20% year over year growth in 2012. A preference for encryption may help Google gain ground like it did in the past.
Google's tweak to its search engine algorithm will change the ranking of some of the most popular sites and invoke change across the board. Companies will pay to encrypt their sites, consumers may opt to use Google's search engine more often if they perceive it as being more secure. This may help Google preserve its user base - an important focus as Bing gains more of a foothold. Introducing a preference for encryption will change the core way the search engine works and provide additional revenue in several areas, including increased users, advertising revenue, and website encryption services.
Google is currently trading at $563.36 on a 52-week range of $502.80 to $604.83. This puts the company at 29.52 times its earnings. Its industry is priced at 31.87 times its earnings. If Google was priced the same as its industry, it would be priced at $608 per share - which isn't too far off its 52-week high. Obviously, it is difficult to generalize an industry for a company as diverse as Google but the idea of the company being appropriately priced at the height of its 52-week range is reasonable. Google may be slightly undervalued and the company's preference for encryption could further push the company's value even further - making now a great time to go long.
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