Google Is Becoming Dominant

Google  (NASDAQ: GOOGL  )  is becoming increasingly dominant. The company is now the leader of not only search, but also online video and mobile operating systems. Google's oversized market share in these categories puts it in pole position to grow its top and bottom line consistently in the future, and it is trading at reasonable valuations as well.  

Strong numbers
Last quarter, Google's top line revenue increased 12% year-over-year to $14.9 billion. Google's operating income in the last quarter stood at $3.44 billion, which represents an operating margin of 23.1%. Net income stood at $2.97 billion, which points to a net income margin of 20%. Google's earnings per share stood at $8.75, which is a year-over-year increase of 34%. 

Based on this fantastic growth in revenue and earnings, Google is near all-time highs. The company's cash hoard surged to $56.62 billion at the end of last quarter. Google's revenue base remains well-diversified, with International revenue now making up 55% of total revenue. As of November, Google's search engine market share in the U.S. is stable at roughly 66.7%, according to comScore.

Motorola is still a drag on Google's bottom line because the company had a $248 million segment operating loss, and Motorola's revenue declined 36% year-over-year to $1.14 billion in the last quarter. 

Google's advertising revenue growth is firmly in place, but the company is selling ads at a lower price. It continues to sell more ads across its various properties, as well as the properties of its other networks. Paid clicks in the last quarter increased 26% year-over-year, but the cost per click trickled down by 8%. Management cited the decline in price per ad to a number of factors, including geographic mix and channel mix, as the company is selling a lot of ads on mobile devices. 

Advertising revenue growth in place
Driven by heavy growth in advertising, Google revenue from its various sites increased 22% to $9.4 billion in the last quarter. In addition, Google's revenue from hardware devices and the Play Store increased 85% year-over-year to $1.23 billion. 

Mobile ads have been a huge success for the company. On average, Google ads on mobile drive more than 40 million phone calls to businesses each month, and drive a lot of store traffic as well. Google's launch of enhanced campaigns on AdWords has provided a seamless experience to marketers looking to build advertising campaigns across various Google properties. A better experience should lead to more ad dollars flowing into other Google assets. 

Google's video-streaming site, YouTube, has a phenomenal position with more than 40% of the website's traffic coming from mobile devices. Management stated that YouTube is rapidly becoming a favorite among big name brand advertisers looking to launch large-scale advertising campaigns. As YouTube has more than 1 billion active monthly users, its video advertising potential remains gigantic.

YouTube is estimated to bring in gross revenue of approximately $5.6 billion, and take home $1.96 billion in revenue in 2013, according to eMarketer. Those are staggering numbers for Google, considering the fact that almost all of the content on YouTube is user-generated. YouTube's market share is estimated to be 20.5% of the U.S. video market, according to eMarketer.

Android's market position is phenomenal 
Android dominates the mobile OS space, as more than 1 billion devices have been activated so far, and more than 1.5 million devices are being activated daily. Largely fueled by Android's worldwide success, Google's Play Store has been gaining tremendous momentum in getting more users, downloads, and most importantly, gaining more revenue.

Android's market share in mobile OS surged past the 80% mark, and Apple's  (NASDAQ: AAPL  )  market share fell to only 12.9% at the end of Q3, according to IDC. However, Apple had a number of big wins recently, including very successful launches of its iPhone 5s and a deal with China Mobile, both of which should help the iPhone manufacturer gain some ground and capture market share from smaller players like Microsoft and Blackberry

Google's Android OS has been instrumental in helping the company's search position on mobile devices. Going forward, Google's mobile advertising revenue is likely to increase even further. OEMs like Samsung have utilized the open-source Android platform to gain very strong market positions. In the last quarter, Samsung alone accounted for 39.9% of all Android shipments, according to IDC. 

Going forward
In addition to Google's core strengths and market-leading positions in search, mobile OS, and online video, the company has a number of moonshots in the making. Google's investments in R&D and futuristic products like Glass, Google Fiber, and self-driving cars might bear fruit for the company down the road. As more advertising budgets move online, Google is perfectly positioned to capitalize on this secular trend and provide search ads, display ads, and video ads across a number of channels on its various Internet properties.

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  • Report this Comment On December 30, 2013, at 10:39 AM, Stkspeculator wrote:

    Ishfaque, if one didn't know better, they would think that Eric Schmidt wrote this for you. The bias in this article represents the epitome of keying in on the high points and ignoring the low. Two major points which were ignored. First, Apple is not interested in producing volume for the sake of volume.Apple is dominating in profit, which is key. Apple should be okay competing against Microsoft and Blackberry. That is laughable. Secondly, Even though they have a much smaller market share, Apple continues to also dominate mobile sales, by a wide margin. Why do you think that Goog's advertising rates went down by 8%? Because nobody with a Google phone purchases anything! As soon as the advertisers realize this Google will never see another dollar.

  • Report this Comment On December 30, 2013, at 1:01 PM, Melci wrote:

    You mentioned Google's 1 billion Android activations and 1.5 million Android activations per day, so why did you neglect to report Apple's equivalent stats which show that Google's "dominance in mobile operating systems" is not nearly as dramatic as IDC's 12.9% smartphone marketshare figure implies?

    Apple has in fact reported that it has sold 700 million iOS devices and last quarter sold 550,000 iOS devices per day or more than a third as many devices as Android's 1.5 million activations per day. And this was during the lull in sales before the introduction of new iPhone and iPad models.

    Considering Apple hit 815,000 iOS devices per day during last year's Christmas quarter (a solid 63% of Android's 1.3 million per day at the time) this year's Q4 should result in a similarly large proportion of iOS sales.

    However, Unit sales marketshare is only useful to advertisers like Google if it results in more eyeballs viewing ads and more importantly, more clicks on those ads and most important of all, more conversions of those clicks to actual sales.

    Unfortunately for Google, that is not happening with Android. Instead it is Apple's iOS that continues to be by far the most lucrative platform for advertisers, e-tailers and e-commerce in general.

    A study of more than 200 billion ads on Facebook by Nanigans, one of the biggest buyers of Facebook ads. found that mobile ads on iPhone generate 1,790 percent more return on investment than ads on Android. Even worse, advertising on Android actually costs more than it returns.

    “Retailers are realizing significantly greater return from audiences on iOS than audiences on Android,” the report says. “For the first three quarters of 2013, RPC [revenue per click] on iOS averaged 6.1 times higher than Android and ROI [return on investment] on iOS averaged 17.9 times higher than Android.”

    IBM reports that during this last Christmas buying season, as a percentage of total online sales, iOS was more than five times higher than Android, driving 23 percent of sales vs. 4.6 percent for Android. In addition, on average, iOS users spent $93.94 per order, nearly twice that of Android users, who spent $48.10 per order. iOS also led as a component of overall traffic with 32.6 percent vs. 14.8 percent for Android.

    - 76% of mobile e-commerce revenue is from iPads and iPhones over Black Friday 2013 (Adobe)

    - e-commerce revenue for iOS 5x greater than Android over Black Friday 2013 (IBM)

    - 89% of tablet e-commerce web traffic in Q1 2013 is iOS (Monetate)

    - 76% of mobile web browsing is iOS (April 2013 figures averaged over Net Applications, ComScore, AT Internet, Statcounter Global Stats (OS), W3Counter, WikiMedia)

    - 98.1% of tablet ad traffic comes from iPads (OnSwipe)

    - 94.6% of Tablet web browser share is iPad (Chitika)

    - 69% of mobile ad viewing share is iOS vs 29% for Android (Chitika)

    - MoPub reports that 75% of ad revenue is generated by iOS users.

    - CPM rates are twice as high for iOS devices compared to Android

    - Click-thru rates are twice as high for iOS compared to Android

    From the point of view of developers, it is the same - it doesn't matter how many devices are out there on a particular platform because if they don't buy apps or view ads in apps, then they are worthless. That is the problem again with Android:

    - iOS developers make 500% more revenue than Android developers in 2013 (Minyanville)

    - In-App purchase revenue is 4x greater for iOS developers than Android in 2013 (BI Intelligence)

    - 84% of mobile games revenue is generated by iOS (NewZoo)

    - iOS games revenue is almost 3x greater than Android in Q1 2013 (IDC and AppAnnie)

    - 51% of in-app and web ad revenue is generated by iOS (Opera)

    - 63% of ad impression within apps came from iOS in 2012 while Android plummeted from 53% in 2011 to 37% in 2012 according to Velti.

    Market share is not an end in itself but a means to an end and Android is not delivering. This is why Android market share gains are a hollow victory.

    Google doesn't sound so dominant after all does it?

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