Based on the 15% jump in it stock price following its second quarter earnings announcement July 16, investors were duly impressed with Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) results. And why not? Revenue climbed yet again, Google's already strong balance sheet improved markedly, and key growth drivers performed admirably.
With Google trading around $700 a share, the question becomes how does it exceed what are even higher expectations going forward? Turns out there are several ways Google management plans to outperform yet again, despite pressure from digital advertisers like Facebook (NASDAQ:FB), and search competition -- particularly in the U.S. -- from Microsoft's (NASDAQ:MSFT) Bing.
What mobile problem?
The so-so results of Google's mobile search efforts have long been a thorn in its side. The reason the ongoing decline in Cost-Per-Click (CPC) rates was front and center for so many analysts and investors was that it supposedly demonstrated Google's slow transition to mobile, and they were right. Google's mobile results were doubly painful considering its primary competition, Facebook, has been knocking its mobile ad sales out of the park for the past year.
In Q1, for example, Facebook generated 73% of its $3.32 billion in ad sales from mobile, up from "just" 59% a year ago. Naturally, new CFO Ruth Porat has taken Google's stance of avoiding too many specifics, but she did make it clear on multiple occasions that the gap between mobile and desktop search, and the corresponding revenues, is "narrowing." Porat also noted that mobile CPC rates are improving. Whether that trend will stem the tide of overall CPC rate declines remains to be seen, but Google is making strides.
For the love of video
In addition to mobile, the second of Google's "two biggest growth drivers" is video -- and for Google, that means YouTube. Google enjoyed "significant growth in YouTube revenues," and all indications are that will continue. Again, specifics weren't forthcoming, but the company did share that YouTube views on mobile in the U.S. now reach more 18 to 49 year olds than any cable network.
And YouTube viewers are spending more time on mobile, up 50% compared to a year-ago to an average of 40 minutes each day. As for revenues, the "ad dollars [are] coming," as evidenced by the average spend of Google's top 100 video advertisers increasing over 60% up year-over-year. The number of Google's video advertisers also grew by over 40% in Q2, and YouTube aficionados can expect gaming "soon." As critical as mobile is for its future, YouTube could prove to be Google's revenue game-changer.
Desktop still king
Even with the improved mobile results, desktop remains the largest driver of search revenues, in part because Google is able to charge higher CPC rates. Yes, that gap is narrowing according to Porat, as is the sheer volume of searches, but desktop still reigns supreme. And as Google demonstrated again last quarter, its 7% jump in the number of paid clicks more than made up for its 4% decline in overall CPC rates.
Google's desktop search leadership position is certainly secure. However, in the U.S. Microsoft's Bing reached a milestone of sorts recently, capturing over 20% of search traffic. That compares to Google's commanding 64% share, but the trend warrants monitoring.
A couple more items to consider
Like any U.S. business with a strong international presence today, Google got hit hard by exchange rates. And investors can expect currency to continue having a significant effect -- it had a negative impact of $1.1 billion on Google's $17.73 billion in Q2 revenues, and that's after factoring in its currency hedging activities. The negative impact would have been $1.7 billion if not for its hedging strategy.
More good news from Q2 was Google's $1.7 billion in "Other revenues", a 17% jump from 2014. The improvement was largely thanks to strong results from Google Play. Now factor in Google's emphasis on mobile Play, particularly gaming, and investors can expect more of the same. In the last two quarters alone, Play added "more than 180 million new gaming customers."
There was a lot to like, and there's a lot to look forward to for Google investors. The successful management of these five key areas should keep driving Google's growth -- and its stock price -- even higher.
Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.