Three Scenarios That Affect Google’s Search Revenues Due To The Advent Of Mobile Devices

+6.07%
Upside
152
Market
162
Trefis
GOOG: Alphabet logo
GOOG
Alphabet

Google (NASDAQ:GOOG) is the biggest online ads company in the world and accounts for nearly 45% of global online ads sales. One of the key trends in the online search industry is the advent of mobile devices for initiating search and following through on queries. Google’s 65% share in the global desktop search market and its dominant position in the mobile search (85% share) is threatened by the advent of in-App search.  While global mobile data traffic grew 69% in 2014, global mobile data traffic reached 2.5 exabytes per month at the end of 2014, up from 1.5 exabytes per month at the end of 2013. [1]

Considering the increasing traffic from mobile devices, growth in web traffic from desktop is expected to slowdown. This is especially true for emerging markets, where most of the first time users who are using smart connected devices such as tablets and mobiles to access the Internet. This increase in mobile traffic may have widespread ramifications for Google’s search share across both mobile and desktop divisions, as they together contribute over 80% to Google’s revenues and makeup 67% of its stock value.

In light of these changes, we will consider three alternate scenarios and their potential impact of Google’s stock price.  While two scenarios cause Google’s stock value to decline, the third scenario explores upside to Google’s stock price. The first scenario projects a decline in PC search market with a status quo for mobile search while the second scenario factors in a decline in Google’s PC and mobile search. The third scenario explores the possibility that Google is able to improve its mobile market share while maintaining its position in PC search. In this note, we will take a look at how these possible scenarios would impact Google’s stock price.

Relevant Articles
  1. Beating S&P 500 by 37% Since The Start Of 2023, Where Is Alphabet Stock Headed?
  2. Beating The S&P 500 By 40% Since The Start Of 2023, What To Expect From Alphabet Stock In Q4?
  3. After 50% Move This Year Alphabet Stock To Outperform The Estimates In Q3
  4. Alphabet Stock Outperformed The Street Expectations In Q2
  5. What To Expect From Alphabet Stock ?
  6. Alphabet Stock Lost 10% In One Week, What’s Next?

Click here to see our complete analysis of Google

How Growth In Mobile Apps Is Affecting Google?

One of the key trends shaping the growth of Internet over the past five years has been the advent of smart connected devices. In 2014, nearly half a billion (497 million) mobile devices and connections were added. As a result, global mobile devices and connections in 2014 grew to 7.4 billion from 6.9 billion in 2013. Smartphones accounted for 88% of that growth. [1]

Due to this growth in smartphones, mobile application development and downloads are on the rise. According to ComScore, a vast amount of media consumption happens on mobile devices, and nearly 88% of  consumption is through apps. [2] Moreover, users spent 60% of their time on mobile through apps (52%) and browsers (8%) combined, compared to 40% on the desktop. Additionally, the average smartphone user downloads three apps per month in the U.S. These figures suggests that more data now originates from mobile, and more than half of it is from apps such as Yelp (local search for services) and Amazon (product shopping). This makes us believe that Google’s search ads revenue is at risk from app-specific usage. We also think that Google has limited upside in search as it is a leader in the online search industry. Unless it can leverage the popularity of Android Smartphone OS, we believe those two downside scenarios are possible. However, if Google can leverage its popularity, reach, and technical prowess to launch new products and search tools for mobile, there is potential upside.

Scenario 1: Decline In PC Search And Stable Mobile Search

According to our estimates, PC search ads makes up 36% of Google’s stock value. The key drivers for this division are Google’s PC search market share, internet searches per PC in use and revenue per search (RPS). With the advent of mobile devices, we believe that Internet searches per PC in use can decline as users use mobile (specifically apps) to search for specific content. We currently expect 82 searches per month from PCs in use. However, the advent of search from mobile can negatively impact this figure. Furthermore, with the increasing use of Bing and Yahoo (both have increased their market share in the U.S.), Google’s share is under threat. While we currently project its market share to remain at 65.5%, if it were to decline to 58% due to competing search sites, there would be a negative impact on our valuation. Additionally, as mobile search increases, advertisers will be willing to allocate additional dollars for mobile ads. This could result in a decline in RPS from projected $27.60 per thousand to $24.20. Even if Google is able to maintain status quo for its mobile search division, the cumulative decline across PC search division metrics can negatively impact our Google’s stock price estimate by 17%.

Scenario 2: Decline In PC And Mobile Search

According to our estimates,  mobile search ads makes up 32% of Google’s stock value. The key drivers for this division are Google’s mobile search market share, Internet searches per mobile device and revenue per search (RPS). Google dominates the mobile search ads vertical due to the popularity of its Android OS. In addition to the decline in PC search performance metrics, Google’s upside in mobile search is limited due to dominant 85% share in the mobile search market.  We believe that a higher probability exists that its mobile share will decline. As more ad dollars are allocated for mobile devices, RPS can increase. Trefis projects that searches per mobile users can grow at a slower pace to 87.4, as most of the search queries will originate from mobile apps.  Furthermore, Trefis currently projects Google’s mobile share to decline to 80% by 2021. However, if mobile share were to decline to 68% (due to shift in user preference in favor of in-App search) and there was also a decline in PC search, Trefis’s Google stock price estimate can decline by 28%.

Scenario 3: Improvement in Mobile Search And Stable PC Search

Google is scheduled to launch its mobile crawler update to address the growing traffic from mobile devices on April 21. [3] This augurs well for our third hypothetical scenario. If Google’s market share in mobile search improves to 90% and search per mobile users grows to 126, due to increase in smartphone users on Android and  new mobile crawler application as well, there is a 20% upside to Trefis’s stock price estimate.

See our complete analysis for Google’s Search Market scenario

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap U.S. Mid & Small Cap European Large & Mid Cap
More Trefis Research

Notes:
  1. Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update 2014–2019 White Paper, February 3 2015, www.cisco.com [] []
  2. The U.S. Mobile App Report, August 21 2014, www.comscore.com []
  3. Google Clarifies The Mobile-Friendly Algorithm Will Roll Out Over A Week, Be A Yes/No Response & More, March 25 2015 []