With Google recently announcing its Q3 2011 earnings results, [1] the Internet giant is further strengthening its dominance in the Internet search market leaving even its nearest competitors such as Yahoo (NASDAQ:YHOO) and Microsoft (NASDAQ:MSFT) behind. We believe that Google’s mobile operating system Android is increasingly playing a large role in its search revenues as the OS closes in on near 50% global market share in the mobile OS market. [2] Google’s next big step is expected to be in the display ad segment through its web properties such as YouTube and Google+.
We have a revised price estimate near $628 for Google’s stock, which is just ahead of the current market price. The revision has been primarily based on our change in Google’s search revenue and margin forecasts, as well as a change in the company’s net cash/debt position.
See our complete analysis for Google’s stock
Languishing Competition Makes Google Search the Clear Winner
With Yahoo’s sale and break-up in the cards as well as a much weaker-than-expected search alliance between Yahoo and Microsoft Bing, Google’s share in the global search market is only climbing. The third quarter has seen Google capturing additional search market share in the U.S., which rose to around 65.5% in September from 64.5% in June. [3] With even smaller competitors like AOL (NYSE:AOL) commanding single-digit search market share and still struggling with its online ad businesses, Google is on the road to clear domination in this segment, especially since Android has also overshadowed the mobile OS market with a 50% expected market share next year.
The Road Ahead For Google – Display Ads
We believe that the next step for Google would be to increase monetization for its display ad business. Google has 2 web properties that can go a long way in building this segment. Firstly, YouTube – the world’s largest video site – is a major asset for Google coming in close to Facebook in terms of user engagement. Google is already betting big on YouTube by planning to produce original content on the website, which was earlier restricted to low-quality, user-generated content.
Source: Nielsen
Google+ will also continue to remain both a challenge and opportunity for Google. The social network has crossed the 40 million users mark as of Q3 2011. However, users alone are not the answer to increased display ads. Facebook has already shown how it can leverage its social network to offer other services such as music, which can considerably increase user stickiness for the company. While Google+ has done good work in building scale quickly, its web traffic would only be monetized well if it manages to keep its users engaged through integrated services like music and games.
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