The miss
Ad prices remained under pressure and affected earnings. The cost per click of the company’s ads was down 6% year-over-year. At the same time, paid clicks were up 23% year-over-year. Google Inc (NASDAQ:GOOG) moved to new “Enhanced Campaigns,” which allow users to manage both PC and mobile ads in one campaign. Mobile clicks are cheaper than PC clicks, putting downward pressure on ad prices.
Google’s competitor Yahoo! Inc. (NASDAQ:YHOO) has shown the same trends in its quarterly report. In Yahoo! Inc. (NASDAQ:YHOO)’s case, the price per click was down 8%, while paid clicks increased by 21%. This shift is most likely to be temporary. As the mobile platform becomes more and more important, more advertisers will compete for this space and push the click prices higher. Another likely contributor to the price drop is a shift in search volumes towards emerging markets where advertisers have lower budgets.
Google’s sales chief Nikesh Arora has stated that better data about users would lead to increased mobile conversions; this will in turn lead to higher ad prices. Facebook Inc (NASDAQ:FB), another of Google Inc (NASDAQ:GOOG)’s competitors on the ad front, has always struggled with low conversions. The click-through rate for Facebook ads is estimated to range from 0.03% to 0.92%. The low end of the range can be considered as not performing at all. In June, Facebook Inc (NASDAQ:FB) eliminated its sponsored search ads. The company plans to get rid of over half of its 27 ad products as having too many options confused its advertisers. These efforts have yet to influence the stock, however, which is down 3% this year.
Revenue growth stalling
If we look at Google’s revenue growth, we can easily see that it is stalling. The company reached its peak quarterly revenue in the fourth quarter of 2012. Of course, the fourth quarter is a peak quarter for advertisers. In previous years, however, Google Inc (NASDAQ:GOOG) managed to post growth as it headed into the new year. Is it a sign that the company is maturing if it lacks growth?
The core of Google’s business is still ads. Google.com and the Google network produce 85.5% of the company’s revenue. On the ad field, Google is competing with Facebook Inc (NASDAQ:FB) and Yahoo! Inc. (NASDAQ:YHOO). While Facebook is trying to monetize its huge user base, Yahoo! Inc. (NASDAQ:YHOO) has put a stake in different products which would attract users and is promising to make video investments in the second half of the year. Google Inc (NASDAQ:GOOG)’s YouTube is a clear leader in the field, but it has had its problems too. Google launched a YouTube-based paid subscription service back in May, but early partners state that the demand for the service is muted. The video advertising field has yet to show its true potential, however.
In the near term, you cannot expect huge growth from the ad side of Google Inc (NASDAQ:GOOG)’s business. The area that you should look at is the project side. Things like project Loon, which is a balloon-powered Internet service for areas outside of a normal Internet connection’s reach, could be big game-changers over time. This is very long-term, of course, and would not impact the share price in the nearest future.
Bottom line
Now, back to the point of this article. Could Google reach $1,000 per share, given that its revenue growth is stuck a little bit? My answer to this is absolutely.
Simple math shows us that if Google Inc (NASDAQ:GOOG) reaches $1,000, it would trade at a 19.2 forward price-to-earnings ratio. This is not a very high number given the company’s position in the market. Yahoo! Inc. (NASDAQ:YHOO), for example, is trading at a 18.91 forward price-to-earnings ratio despite the fact that it issued soft guidance on the second half of the year. It looks like investors believe that the impact from mobile advertising for both Google and Yahoo! Inc. (NASDAQ:YHOO) is temporary.
Facebook Inc (NASDAQ:FB), which is trading at a 33.4 forward price-to-earnings ratio, has yet to show the world a clear monetization strategy. The company’s large user base allows it to trade at relatively high multiples, but the hope for better results diminish with each month that it doesn’t deliver on its promises.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG).
The article Could Google Reach $1,000? originally appeared on Fool.com.
Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
