A stock like Google (GOOG 0.42%) can be confusing for the individual investor to understand. There's a lot of moving parts to its business and it's often difficult to separate the noise from what really matters. Considering nearly 90% of Google's revenue came from advertising last quarter, Google's stock will likely perform based on how it can deliver an increasingly relevant advertising experience for users and marketers alike. Moreover, Google has to find innovative ways to drive higher volumes to its highly lucrative Google Search business. Simply put, the more eyeballs on Google Search, the more money it can command from advertisers.
Stocks like Google are in a unique position to benefit from the tremendous growth opportunities in an age where everything is becoming more connected. For investors, it's important to understand what factors will contribute to a prosperous future for both Google and its shareholders.
The early lead
The mobile-computing revolution has put Google and its stock at the center of it all. Currently, the world has only reached about 25% smartphone penetration, of which Google commands about 70% of the market. This gives Google's highly lucrative Google Search business a lot of opportunities to generate more search volume. However, given the fact that smartphones and tablets have less screen real estate than their PC counterparts, it has put pressure on the price that Google can command for mobile advertising. Mobile advertising is such a new medium that marketers are unsure whether it will mimic advertising conversion rates and expectations that they're accustomed to with PC advertising. However, the evidence is beginning to suggest that mobile ad rates should begin rising, especially for tablets, which most mirrors PC user experience. Over the long term, increased ad rates should help support Google's stock price.
The ace in the hole
YouTube is undergoing a tremendous transformation that should help drive more advertising spending toward online video. Through the use of channels, YouTube seeks to mimic the traditional television experience in the sense that users won't have to actively seek out content. In the month of February alone, comScore estimates that YouTube served 2.2 billion video ads to 178 million U.S. viewers, marking an all-time high for videos ads served in a month. Overall, U.S. YouTubers watched a total of 11.3 billion videos, which breaks down to about 362 minutes per viewer -- more than four times as much as what the closest competitor garnered.
A warranted concern
Even a great stock like Google cannot avoid its fair share of concerns. The open source nature of Android has been both a blessing and curse for Google. It has allowed Google to greatly expand its market share in mobile search, but now this business interest is currently being threatened by companies like Amazon and Facebook. Both companies have taken the Android shell and modified it in such a way that Google's business interests' have been completely undermined, which suggests that Google has perhaps lost control of Android.
The cherry on top
What's really got me excited about Google's stock is that the online advertising business is still very small compared to offline advertising. Currently, the online advertising industry is worth about $100 billion, where the offline advertising industry is worth around $700 billion. Over the next five years, Google Chief Business Officer Nikesh Arora believes that there's a "reasonable probability" that over 50% of total advertising spending will go online. In his mind, interactive television viewing experiences will go from "nice-to-have" to "must-have" within the next five years, acting as a key catalyst for ad spending to shift online. Combine YouTube with Google Hangout and all of a sudden Google becomes extremely well positioned to benefit from a $300 billion shift to online advertising.
Between a $300 billion growth opportunity, Google's innovative nature to drive new areas of growth, and the company's current valuation of $260 billion, buying Google stock today offers fantastic growth potential in the years to come.
