Google Headed to $1000 on Short-Term Growth Drivers
Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Internet analysts at Jefferies recently raised Google’s (NASDAQ: GOOG) price target to $1,000 from $875. Several factors are playing out to the stock’s advantage, including higher cost-per-click rates on ads on mobile devices, better ad volume at YouTube, and a better stream of devices from the Motorola handset and tablet hardware division.
It's been six weeks since the company reported its fourth-quarter earnings. Since then the shares have soared almost 20%. Google has their fingers in a lot of pies such as operating systems, smartphones, tablets, and most recently wearable computing. This article focuses on Google’s two primary growth drivers -- new hardware launches and rising ad revenue.
Growth Driver 1: Google’s New Hardware Launches
Motorola’s upcoming flagship X Phone: X Phone is expected to be a Nexus style ‘pure’ Android play with deep integration Google services, a powerful camera, a 5 inch screen with a thin bezel, and broad carrier support. Given the current state of Motorola hardware sales, a phone like this could drive significant percentage sales gains (off a low base).
Launch of Chromebook Pixel: Google made an ambitious assault on the high-end laptop market by announcing the Chromebook Pixel, which features a large-format, high resolution touchscreen. The high resolution touchscreen is designed to help developers build apps and services that work seamlessly across multiple devices.
How Does Chromebook Pixel Stack Up Against Macbook Air?
Chromebook Pixel represents Google’s first foray into the high-end market segment. One of the most important features on all high-end laptops these days are their screens. Google said that it does not think in terms of market share, but a high-end laptop puts it in direct competition with Apple (NASDAQ: AAPL), particularly with the Macbook Air. Pixel offered better specifications for its price. Google said: "It will stand up well against a Macbook Air. Air doesn't have touchscreen or a high resolution screen, so with Pixel you get a lot for your money."
Apple was first to introduce the use of the word Retina to refer to their crisp, bright, colorful and pixel rich screens first featured on the iPhone 4 then iPad 3. Since then retina displays have appeared on MacBook Pro, both on the 13″ and 15″ range but not on the popular MacBook Air, currently in its 4th generation. The difference between retina displays and standard screens is in the details, literally. The screen offers more pixels per inch, at high resolutions such as 2560 x 1600 and 2880 x 1800 for MacBooks and 2048 x 1536 on the iPads.
With the release of Pixel, one can hope that the new MacBook Air, due to be released some time this year, will take it’s cues from the amazing technological developments Google has on the Pixel and will contain at least the equivalent high resolutions of 2560 x 1600 -- this is still not as high as the Pixel, but is the highest possible for the current screen ratio on the MacBook Air.
Growth Driver 2: Google’s Rising Ad Revenue
Better Ad Volume at YouTube: For YouTube, ads that run “in-stream” or “pre or mid-roll” called “TrueView” is helping make a better video ad experience (because you can skip them after 5 seconds), and that results in a better yield in terms of revenue. Analysts expect YouTube revenue rising 76% this year to $4.5 billion. Personal training company TRX doubled the revenue generated in its YouTube channel when it implemented TrueView ads. The company also doubled conversions (% of ads resulting in a sale) and had a 20% view-through rate across 2MM+ video views.
Higher CPC Ad Rates on Mobile Devices: Mobile ads is a $4.4 billion industry that is only about 10% of total U.S. ad spending and will see more shift from traditional advertising. A recently announced initiative by Google called “Enhanced Campaigns” will close the gap in CPC between higher-priced desktop Web ads and ads on mobile devices.
Unexpected Growth of U.S. Mobile Ads Positive for Google
U.S. mobile ad spending is growing more quickly than previously expected, due in large part to the success of so-called “native” ad formats like Facebook’s (NASDAQ: FB) mobile newsfeed ads and Twitter’s Promoted Products. U.S. mobile ad spending is expected to reach $7.19 billion in 2013 and nearly $21 billion by 2016, according to eMarketer.
Facebook offered no mobile ad opportunities at the beginning of 2012 but grew its mobile business at an astonishing and unexpected rate. Before Facebook’s Q3 earnings call, most researchers and analysts expected its mobile ad revenues of roughly $45 to $100 million, according to figures examined by eMarketer. But after the earnings call, analysts’ expectations hit $339 million for 2012.
Most of Google’s mobile ad revenues come from search, and eMarketer estimates Google maintains a 93.3% share of the overall $1.99 billion U.S. mobile search ad market. Spending on mobile search ads in the U.S. is expected to jump 55% to $3.6 billion by the end of this year -- of which Google is expected to earn a 92.4% share.
Google’s mobile display business is also growing quickly, driven primarily by the underlying strength of its AdMob network and its pre-existing relationships with advertisers looking to extend their display efforts to mobile devices. Google’s share of U.S. mobile display advertising was higher than all but Facebook in 2012. The bulk of future growth for Google’s mobile display business, eMarketer predicts, will come from mobile monetization of YouTube.
Google has quietly built and executed on a strong federated suite of mobile and web services, apart from its hardware ventures. Google’s growth drivers, as stated above, have converted the company to a revenue generating machine. $1000 is certainly possible for Google’s stock this year.
Anindya Batabyal has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, and Google. 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!