Google (NASDAQ:GOOG) has introduced new mobile search ad formats within mobile apps^[1] and this announcement comes soon after its Q3 2011 earnings release where its search business delivered a strong performance driven by growth in mobile searches. Google’s mobile operating system (OS) Android has a majority market share of around 50% in mobile search market,^[2] and the introduction of contextual search ads within apps can generate meaningful ad revenues for the company in the future. Google leads the Internet search market globally with a market share of an estimated 68%, way higher than the market shares of AOL (NYSE:AOL), Yahoo (NASDAQ:YHOO) and Microsoft (NASDAQ:MSFT) combined.

Our complete analysis for Google’s stock is here.

Google Integrates Search Ads and Apps in Mobile Advertising

Google has just launched contextual ads or “Custom Search Ads” as it calls that lets you search for information within a mobile application, and developers will likely make more money through these custom search ads, according to the company. Another ad format is “Click to Download” that connects you directly to the app store or Android Marketplace when you search for a mobile app on Google.

In addition, Google has also introduced “Mobile App Extensions” that enables businesses to use mobile search ads to direct consumers to a page within a mobile app already installed on their smartphone. Google explains this in its blog, “if someone searches for sneakers on a mobile device, they might see an ad that takes them directly into a cool shopping app they’ve installed on their phone.”^[3]

Mobile Ad Revenues to Drive Future Growth

In Q3 2011, Google posted a 28% increase y-o-y in paid clicks, the number of times Internet users click on Google ads, and a 5% increase y-o-y in Cost per Click (CPC), the price that advertisers pay Google for each user click.^[4] A rise in mobile searches is a prime factor for this growth and the introduction of Custom Search Ads will further the company’s search ad revenues in the future.

We estimate that Google revenue per search (RPS) – a function of the click through rate (CTR) on ads and CPC – has declined over the last few years (as you can see in the chart above) due to higher search volumes in lower RPS generating verticals like entertainment, local ads and consumer products, as well as due to increasing international mix in overall searches.

While we estimate Google’s revenue per search (per 1,000 searches) will decline from $13.80 in 2012 to $9.84 by the end of our forecast period, Trefis members expect a smaller decrease from from $15 to $13.50 during the same period. The member estimates imply an upside of 22% to the Trefis price estimate for Google’s stock.

We currently have a Trefis price estimate of $628 for Google’s stock, about 8% above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

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