Credit: Shutterstock photoGoogle ( GOOG ) is set to release its Q2 2014 earnings on Thursday, July 17. In Q1, the company posted that its revenues grew by over 19% year over year. The result failed to enthuse the market which was expecting far better growth in both the top line and the bottom line. The primary reason for this was a decline in cost per click (CPC), which has been in a long-term decline for the past two years. However, this decline was offset to some extent by the adoption of its enhanced campaigns program that combines marketing campaigns across mobile desktop and laptops, i.e. across screens of different sizes. This program was instrumental in ad volume growth across the display and search ad divisions. In this earnings announcement, we expect the enhanced campaigns program to once again drive revenue growth across its mobile and PC search ad divisions. Furthermore, as YouTube continues to gain popularity, we expect display ad revenues to be higher.
Click here to see our complete analysis of Google
Revenues From Mobile Ads To Grow
The mobile search ads division is the second largest division for Google and makes up approximately 29% of its total value, according to our model. Google, with 90% market share, dominates the mobile search engine market. One of the key reasons for this dominance is its flagship Android OS, which has witnessed excellent adoption and penetration in the smartphone space. A user with an Android phone is more likely to use Google search compared to a user using another OS. This is especially relevant when competing with OS's such as Windows Phone use their own search engines on the mobile devices. Considering that Android is expected to have a market share of over 80% in the smartphone industry by the end of 2014, we expect revenues from mobile ads will continue to grow at a robust pace in the second half of 2014. Furthermore, as the multi-platform enhanced campaigns program continues to evolve and adoption rate goes up, we expect the aggregate paid clicks to increase and boost the number of ads sold in Q2.
Video Ads To Boost Revenues From YouTube
According to our estimates, YouTube contributes approximately 8% to Google's value. According to comScore, Google is the market leader in the online video content industry. The primary reason for Google's dominance in the video ads industry is its reach among users with nearly 150 million unique viewers as of May 2014. According to comScore, Google sites are also ranked as the top video ads web property in the U.S., reaching 34% of the audience. We expect that the unique user count for YouTube rose during the quarter, given the increasing popularity of this platform. Furthermore, as the explosive growth in online video ads spending continues, YouTube will be able to leverage its popularity to buoy Google's revenue going forward.
Cost per Click To Affect Search Ads Revenues
We currently estimate that PC search ads contribute approximately 35% to the firm's value. The company, with a 65% market share, dominates the PC search engine market. The cost per click (CPC), a metrics that measures the price paid for the number of times a visitor clicks on a search ad, has been on a steady decline for the past few years. As a result, company's top line growth from search ads has failed to capitalize on the growth in search volume. Furthermore, the recent trend indicates that over 50% of the web traffic is coming from mobile devices. As advertisers realign their ad budgets in favor of mobile devices, chances are that desktop revenue per search (RPS) will suffer. Therefore, we expect the downtrend in RPS (also known as CPC) to continue in Q2, and the company to report lower RPS. Currently, we project RPS to decline from $23 to $22 by 2020. However, we expect ad revenues to grow in absolute numbers, buoyed by growth in search volume.
We currently have a $547 price estimate for Google , which is 6% below its current market price.
See More at Trefis | View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
