A Closer Look At Google’s Ad Performance In 2017

Google (NASDAQ:GOOG) had a solid year thus far, with superlative growth in revenues from the search ads business. However, the operating margins for the company declined as anti-trust fines imposed by the European Commission eroded profitability. Nevertheless, parent company Alphabet’s stock price has surged from $800 at the beginning of the year to around $1073 currently. In this note, we explore the performance of the company’s Ad business during the year.

Click here to see our complete analysis of Alphabet

Ad Volumes Drive Revenues Amid Declining Cost Per Click

Trefis currently estimates that PC search ads, mobile search ads, ads from partner sites and YouTube ads contribute over 80% to Alphabet’s value. Together, these units make up the company’s Ad revenues, which form 88% of total revenues. During the year, Cost per click (CPC), a metric that measures the price paid for the number of times a visitor clicks on an ad, has been on a steady decline. For the first nine months, CPC declined by 22% on Google websites and 11% on network member sites. Furthermore, aggregate cost per click declined by 20% during the quarter. However, paid clicks, which represents the volume of search ads on Google, grew by 48% in the first nine months of the year. As a result, the ad revenues grew by nearly 20% to $68 billion in the first three quarters. We expect that this trend will continue in the fourth quarter as well, and the company to exit 2017 with around $94 billion in ad revenues.

Programmatic Platform Boosting Ad Volumes, Impacting CPCs

Google is focusing on its programmatic businesses including AdMob, AdExchange and DoubleClick Bid Manager, which continue to grow at a strong rate. One of the reasons for the decline in CPC was the rise of DoubleClick Bid Manager, which monetizes at generally lower rates than ad clicks on Google.com. As Google is increasingly looking to monetize its properties through its programmatic platform, which matches relevant ads with content, Trefis anticipates that CPC (Revenue per search) will continue to decline over the ensuing years as the programmatic platform does away with inefficiencies of improper ad matching. This could result in lower than expected top line growth, though growth in ad volumes will likely remain in the high double digits as the programmatic platform improves its reach by automating ad matching.

Mobile Ads Continue To Drive Revenue Growth

Google has seen a shift in the online ad landscape as the secular trend from desktop towards mobile continues to unfold. The company reiterated during the year that its monetization rate for mobile devices has improved on the back of increased adoption of mobile for both text and voice search. Furthermore, the company continues to roll out new ad formats for mobile devices that support the scroll and swipe action on a smartphone. However, the increasing share of mobile search is driving traffic acquisition costs (TAC) higher as many mobile searches are processed through paid access points (i.e apps with subscription features), which carries higher TAC. As a result, the company’s overall TAC grew by 27%. Total TAC as a percentage of Google advertising revenues grew by 150 basis points to 22.5%. Going forward, we expect mobile search ads will continue to drive revenue and TAC higher.

YouTube To Drive Next Leg Of Ad Revenue Growth For Alphabet

During the year, YouTube continued to drive revenue growth, as 1.5 billion monthly viewers viewed 60 minutes of videos each day on their phones and tablets. According to the company, YouTube has become the platform of choice for major brands, with a highly engaged audience. Research also suggests that many users turn to YouTube to help them in making purchasing decisions by watching videos about items they are considering buying.  The company is now offering more six-second pre-roll ads, which has increased the ad viewability rate from 66% to 95%. Going forward, YouTube will be an important growth driver for Google, as online video ads are expected to grow exponentially. The company is also planning to launch over 40 original shows this year for its subscription service, YouTube Red, to boost its revenues from these services in the ensuing quarters.

Our $915 price estimate for Google is slightly below the current market price.

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

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

More Trefis Research