Google Is Losing Ground to Yahoo! and Bing

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Yahoo! (NASDAQ: YHOO) may be transitioning away from a purely advertising-driven business model. While it is true that the company’s core thesis is in large economies of scale and large scale advertising, the company’s business will have to change in order to sustain higher rates of revenue growth going forward.

Yahoo! has been growing

Source: Alexa

Yahoo! has been able to increase the number of search queries for its business, but at extremely low rates. The company’s core advertising business seems to have fully matured. While there may be opportunities in emerging market economies, I think that the company’s strategy of brand-extensions will come to an end. That’s not necessarily a bad thing though. It just means that the company will be more focused on growing its business outside of banner advertising.

Currently Alexa ranks Yahoo! as the 4th most visited website in the world. Its’ positioning will not change by much. The company isn’t hoping to increase the number of visits on its websites, but rather to increase the amount of profit generated from each user. The company is focused on reducing spending, increasing the number of talented employees, and acquiring other companies.

Source: Yahoo!

Yahoo! provided revenue guidance of $4.5 to $4.6 billion for the 2013 fiscal year. In 2012, the company generated $5 billion in revenue, but the company is projected to generate a 10% haircut on revenue. On the bright side, the company will be reporting Non-GAAP operating income of $1.1 billion for 2013. Comparatively in 2012 the company reported $566 million in Non-GAAP operating income. The operating income is expected to double in 2013.

Advertising revenues will comprise a vast majority of the company’s revenue stream over the short-term. Over the long-term, the company will become increasingly dependent on its search-engine business, and alternative business models.

Google another compelling investment opportunity

While Yahoo! has a clear investment thesis, investing in Google (NASDAQ: GOOG) is a no-brainer. Almost every forward-looking forecast assumes that Google’s growth will be driven by search and mobile.

Mobile computing will continue to grow at astounding rates. The tablet business is driven by emerging market economic growth, paired with declining costs of owning a personal computer. In the future, laptops are expected to be displaced by $300 tablet devices. Tablets are portable, cheap, and less expensive than the Windows ecosystem surrounding laptops.

Believe it or not, tablets provide enough screen space for visual ads to be displayed. Some of the issues in mobile are slightly off-set by the rapid growth in the tablet market. Taiwan Semiconductor Manufacturing projects that tablet demand will grow at a 23% compounded annual growth rate. Google’s banner advertising business (Google Adsense) should sustain high rates of growth. But more importantly its’ search business will benefit from both the rapid growth in smart phones and tablet devices. Because of this, Google will remain well positioned going into the future.

Just Bing it

I remain a fan of Microsoft (NASDAQ: MSFT), especially in the internet space. Microsoft will continue to grow its’ advertising empire going forward. This is driven by the fact that Apple iOS 7 will be using Bing for Siri on iOS 7.

Let’s be clear though, Microsoft has been scratching Apple’s back lately. Just look at Microsoft’s launch of Office 365 onto the Apple ecosystem. Microsoft and Apple have been more active with strategic partnership lately, in order to dethrone Google from being the king in mobile.

Source: comScore

Google has seen its market share consistently decline against Microsoft and Yahoo!. This isn’t very surprising when considering the sheer amount of growth the company has experienced in its search business internationally. The comScore results only measure the United States. The data basically indicates that while Google secures an advantage initially, it eventually loses out that advantage to competitors over time. This could be a great leading indicator for the Microsoft and Apple duo in mobile.

I believe that Google will maintain a healthy amount of market share in both search and mobile. Microsoft will be stealing some of Google’s thunder. Google will be okay, though, because it makes up for this lost market share in the United States with exponential growth in emerging markets.

1.4 billion people will be entering the middle class over the next ten-years, and 98% of that will be in the emerging markets (according to Proctor & Gamble). Microsoft’s Bing will grow in the United States, but Google will win the world. In the end, both companies are likely to grow.

Conclusion

Google is the most compelling investment, with Bing and Yahoo! biting at the heels of Google. In the end, these three web properties are likely to grow but at un-even rates. Google will grow the fastest, with Bing in second, and Yahoo! in third.

However, the up-side to Yahoo! is its’ acquisitions, and cost-cutting. Bing may grow at slower rates, but then again, Microsoft has other opportunities that are going to be lucrative like Office 365.

As one of the most dominant Internet companies ever, Google has made a habit of driving strong returns for its shareholders. However, like many other web companies, it's also struggling to adapt to an increasingly mobile world. Despite gaining an enviable lead with its Android operating system, the market isn't sold. That's why it's more important than ever to understand each piece of Google's sprawling empire. In The Motley Fool's new premium research report on Google, we break down the risks and potential rewards for Google investors. Simply click here now to unlock your copy of this invaluable resource.


Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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