Google's Road to $1000
Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The powerful Google (NASDAQ: GOOG) is still heavily reliant on search advertising for generating most of its revenues. However, the company is increasingly getting a lot of momentum in its other businesses as well. Some of these have strong growth prospects in the long-run, which will likely lead the company to grow in the 15%-20% region for years to come. Google has four catalysts that will propel the stock to the $1000 mark.
1. YouTube becoming a major outlet for video ads.
YouTube has enormous revenue growth potential which is often not reflected in Google's own numbers. Google is tight-lipped about how much revenues its YouTube division earns, but it’s reasonable to believe that YouTube is already a multi-billion dollar segment for the company. And it is growing rapidly, and has more than 800 million unique visitors every month, who watch more than 4 billion hours of video a month.
The popular video-sharing platform is increasingly getting a lot of attention from advertisers, as Google revealed that, its top 100 advertisers ramped up their spending on YouTube by 50% in 2012, compared to 2011. A key driver of YouTube’s growth has been the skipable ad format of Trueview. Because advertisers only pay for those ads for which users actually watch the ad.
Advertising agencies and marketers increasingly prefer this advertising format on YouTube. Now, 70% of all in stream ads on YouTube are now utilizing the TrueView format. YouTube will be a beneficiary of increased global internet penetration as it gets almost 70% of its user traffic from outside the U.S.
In addition, it has a strong footing on mobile, as a quarter of its total views are on mobile devices. Both these secular trends will drive the segment's revenues as advertisers migrate online from regular TV for the placement of video ads.
2. Hardware offerings and mobile monetization
Google is partnering with a number of firms, to market newer hardware devices, but tablet and laptop sales make up a small fraction of the company's current revenues. But in this pursuit, the market-leading Android and Motorola, will aid substantially in growing revenues from more hardware devices.
In addition, Google Play is investing heavily to add more content and bringing in newer partners. Hardware offerings provide substantial tailwind for benefiting from Android-based platforms in the form of selling more content, as well as the placement of more Ads on mobile devices.
Price per ad on mobile are much lower relative to desktop but as more and more mobile devices are getting activated, the price will notch up. Google's management has indicated that they expect the Mobile cost-per-clicks(CPCs) to improve going forward.
3. Cloud Computing Services
Google's Cloud locks horns with Amazon (NASDAQ: AMZN) and Microsoft and a number of other leading enterprise solutions firms. However, it seems that investors are not taking into account Google's ability to do very well in the cloud computing business.
Amazon is widely considered the clear and runaway leader in the cloud computing space, and will likely be the long-term leader as well. However, competitors like Google and Microsoft (NASDAQ: MSFT) are ramping up their efforts to play catch-up with the disruptive Amazon.
More importantly, Google has the infrastructure readily in place, as well as the enormous scale required to be successful in the cloud. Google’s Enterprise business continues to gain traction amongst the biggest companies in the world, and is now growing at an impressive rate. Large corporations and govt. agencies are moving their business to the Google Cloud. There are immense growth prospects, and Google has the potential to bring in millions of incremental revenues from the sector.
4. Google's cash cow
More online users translate into higher search volumes for Google's search function. Google is substantially ahead of all competitors in the global search engine marketplace. The highly targeted mechanism of search advertisements prompts marketers to use more search ads.
However, due to more consumer time being spent on mobile and on apps, Google's Cost-per-click (CPC) is on the decline. And also, part of that decline was due to the increased number of ads being placed in international markets, as Google has a huge presence outside the U.S. Google continues to portray more ads in its search platform, as evidenced by the healthy growth of 24% year-over-year in aggregate paid-clicks in its most recent quarter.
Competitors like Microsoft attract a lot less advertisers relative to Google. And over time, marketers of all sizes will embrace ads on Google's search function even more.
Google has, in the past, managed to grow by acquisitions, and can easily acquire a number of companies with its huge cash position as well. It is reasonable to believe that Google will be a major beneficiary of a number of secular long-term consumer trends. Increased accessibility through mobile devices, higher penetration rates in certain markets and faster Internet connectivity etc. will jointly provide substantial tailwind for growing Google's fortunes.
ishfaque has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Google. The Motley Fool owns shares of Amazon.com, 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!