Innovation is Google’s Key to Maintaining Search Leadership

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Google (NASDAQ:GOOG) has maintained its dominant position in the search advertising market and does not plan to yield market share quietly. The search engine giant has consistently increased its market share over the years by launching products that leverage new technologies and media as well as by acquiring companies that support its search business. The underlying factor that has been fueling constant growth for Google is innovation. Though some of its products like Buzz, Wave, Web Accelerator, Google Answers, and Google Checkout among others, haven’t garnered the desired turnout, this hasn’t stopped Google from experimenting with new product ideas. And why shouldn’t it, when it has to fend off its market share from competing search engines like Microsoft (NASDAQ:MSFT) Bing and Yahoo (NASDAQ:YHOO) as well as the mother of all social networks, Facebook.

One such product that Google is already thriving on is extensive adoption of its Android OS in smartphones. Google is also expanding its travel search offering through its acquisition of ITA last year and is also introducing new products to compete in the expanding social media space. While we anticipate Google’s search market share will expand from 68% in 2010 to ~72% by the end of our forecast period, Trefis members predict a share of 75%, implying a modest upside of 3% for our estimate of Google’s stock.

We currently have a Trefis price estimate of $576 for Google’s stock, in line with the current market price.

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Rapid Growth in Mobile Ad Market

According to eMarketer estimates, the U.S. mobile ad spending market is expected to surpass $1 billion this year, an increase by 48% from $743 million in 2010. [1] Google will be the main beneficiary of this increase, and according to some estimates, Google’s mobile search market share was higher at 98.3% than its overall search market share 90% as of July 2010. [2] With Android’s expanding share in the mobile phone OS market, Google will significantly benefit as it will be the default search engine on Android phones. (see Google’s Stock Worth $680 on Mobile Search Growth)

Google Expands Travel Search Offerings

Last year Google acquired ITA Software, a flight information company which provides travel-related data  to other online travel sites like Expedia, Kayak and Travelport, along with search engines such as Microsoft’s Bing. This acquisition helps Google better travel experience than Bing as well as earn extra revenue by license flight data to travel sites while negotiating for higher payment rates. (see ITA Acquisition Helps Google in Online Travel Search)

Google Sets Eyes on Social Search

Facebook’s user base of 500 million surely does envy Google, whose earlier attempts in building social media apps like Wave and Buzz failed. But this hasn’t deterred Google from innovating new products. Google has made a number of acquisitions for the development of its major upcoming social networking project named Google Me, which is scheduled for launch this year.

We believe initiatives as the above, despite a few failures, are expected to boost Google’s search market share going forward.

Our complete analysis for Google’s stock is here.

Notes:
  1. Quick Stat: US Mobile Ad Spending Expected to Break $1 Billion This Year, eMarkter.com, April 13, 2011 []
  2. Google Undisputed Heavyweight Champion of Mobile Search, Pingdom.com []