- Android Pay will be far more successful than Google Wallet. Also the app will give the tech giant targeted information about its users
- The new Google now on tap app has the potential to be a game changer. Google seems to be first to market here regarding the sophistication of the app. Expect competitors to follow suit
- Goldman Sachs came out with a recent target price of $800 for Google Stock. I don't see Apple's ad blocking initiative on iOS9 gaining much traction
Some investors have definitely become worried about the future trajectory of Google (NASDAQ:GOOGL) due to its recent share price performance (despite its July earnings rally) and the announcement of "Alphabet" which is the newly created parent company. Alphabet will oversee two divisions
- Google's core search and advertising business
- Diversified businesses such as self-driving cars, drones, Nest, Google Ventures, etc.
This announcement was definitely needed as a lack of transparency definitely weighed on the share price in recent months especially with all the ventures the company is currently undertaking. For example take a look at the chart below which shows Google's share price underperforming in comparison to Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL) over the last 12 months.
Google's share price was actually down slightly this year (-1%) which had many investors doubting whether the stock could realistically regain former growth levels. One reason is clear. Its search advertising business has definitely flattened in recent quarters despite the $17.72 billion posted for revenues in Q2 of this year which was a 11% YoY increase. Nevertheless the growth of its search revenue division is definitely declining with the reason being that marketers are shifting more of their ad spend to mobile platforms as well as other websites such as Facebook. However, Google has seen this threat coming and is definitely adapting to this hugely competitive space. Lets go through 3 areas where Google can definitely make inroads starting with mobile
Firstly Google announced the launch of Android Pay in the US last Thursday and I believe this version will do far better than its predecessor (Google Wallet). Technology is rapidly sending us into a world where no cards or cash will be required and I think Google's offering will be at the forefront for a variety of reasons.
- The growth stats are staggering. Mobile payment transaction volumes were $300 billion plus in 2014 and are expected to surpass $700 billion by 2017. However the real growth is going to come from the point of sale transactions (P.O.S) - transactions at physical merchant stores where you display your mobile instead of handing over cash or a credit card. Here growth is expected to go from $3.5 billion (in payments) in 2014 to $118 billion by 2018. Therefore the fundamentals alone will be a huge tailwind for Android-Pay going forward.
- There are more smartphones running on android than any other mobile operating system. Over 1 billion android phones were sold last year which means "Android Pay" should have an advantage over "Apple Pay" in terms of scale. Furthermore the majority of existing android users are likely to keep using android due to cost reasons or because it is easier to use
- Android Pay should also substantially help Google's advertising metrics. Knowing what its users are buying is information that could definitely be used in targeting relevant adds. This point is extremely important because Google is coming up against powerful competition in this area at present. Over time, platforms that can better target their ads will be the ones who keep impatient advertisers happy.
Secondly "Google now on tap" feature which is an upgrade of the existing Google Now tool is getting rave reviews. The feature gives the user even more intelligent feedback about what he or she is doing at that time. This app is turning mobiles into computers as the feature basically waits for you to summon it after which it will give you its recommendations. It can work as a fantastic reminder tool or also a forward looking reservation maker. Bears will point to the privacy issue but I believe smartphone users are finally becoming aware that all app activity is being monitored. Its a fact of life. Furthermore this app only gives its input if you summon it - it will not prompt a suggestion which is a smart play by Google. Apps such as these have the potential to bind a user more closely to the android system which is what Google wants in the long term.
Furthermore I don't see Apple's announcement this week as a huge threat to Google's advertising revenues. Apple came out a few weeks ago and announced that its new iOS9 will enable users to block ads on its Safari browser. Google generates over $11 billion annually on mobile advertising of which more than $8 billion comes from iPhones and iPads. Obviously a move such as this wouldn't affect Facebook or Twitter as they have their ads on their own platforms. Nevertheless, I see Google coming up with a solution. First of all, there are a number of things that must happen for an iPad or iPhone user to have no ads on his search experience.
- The user needs to be using Safari on an Apple device which many Apple users don't.
- The user has to actually opt out of ads.
- Then you have different types of adds such as banners, pop-ups, pre-rolls, etc. I don't expect the opt-out process to be black and white but instead a tick the box type process.
What Google shareholders need to consider here is that advertising runs the web. Websites and businesses need to sell advertising in order to sustain themselves financially. If Apple's initiative gains traction, Apple runs the risk of having third party websites not being optimized for use on Safari. Then you would have a situation where users would jump ship to a different browser which would not be something that Apple wants.
To sum up, I concur with Goldman Sachs (NYSE:GS) recent Google target price of $800 a share. Under the new CFO's (Ruth Porat) guidance, this company has expanded profit margins over the last two quarters. I expect to see mobile monetization growing substantially in the next 12 to 24 months owing to fundamental factors mentioned above as well as Android Pay. Facebook may make some more inroads on the mobile ad front but I expect YouTube to continue to dominate the video streaming market. YouTube's audience is growing and users, over time, are spending longer periods on the website. Furthermore, Porat believes YouTube is under monetized and we can expect to see revenue gains here in the quarters to come.