Competitive Headwinds Fail To Dampen Google Valuations

  • Google’s ad network will be confronted with more competition.
  • Google’s ad network CPC (cost-per-click) has trended lower, and there’s very little that Google can do to mitigate this trend.
  • Despite these shortcomings, Google stock remains a buy due to its reasonable valuation along with growth potential in emerging and pre-existing business segments.

GOOG Atlas competition

Google (NASDAQ:GOOG) may be at the losing end of a disruptive technology cycle, as Facebook (NASDAQ:FB) has plans of developing a more superior ad platform for buyers and sellers of ad space. This puts Facebook in the driver’s seat of something that Google has long held dominance in.

While, Google’s stock price has shown a fairly strong performance in 2014, I think that competitive headwinds will eventually weigh on financial performance further into the future. Google has historically responded to competition through innovation and development of new and disruptive business/technology models. I think that this trend will continue, but it will take time to see those types of developments materialize into meaningful financial results.

Google’s AdSense network will get squeezed

In an article for Seeking Alpha, I go into great detail about Facebook’s update to Atlas:

Facebook is set to launch a revamped version of Atlas next week, which is a demand-side platform that will allow advertisers to buy from a larger network of websites, and will help advertisers understand what kinds of ads a Facebook user has clicked on outside of Facebook timeline and banner ads. Furthermore, Facebook can track behavior across mobile devices, where cookies don't work, and allow advertisers to understand offline behavior.

The updated version of Atlas may be powerful enough to give advertisers meaningful data on users outside of Facebook. This will allow advertisers to tailor a display-ad to the intended audience, perhaps allowing for ads to be bought and sold on more of a targeted basis. This puts Facebook in a pretty solid position to gain momentum in the ad-network business that Google has long held dominance in.

Google revenues by source

Google’s network revenue has shown slowing rates of growth, and more importantly is the second largest segment in terms of actual revenue. However, Google Sites, i.e. Search, YouTube, and whatever other Google owned property generating ad-revenue has shown considerable growth over the past three years.

Google cost per click trends

The weakening growth in the Network segment is mostly driven by the poor performance of display ads due to the greater mix of mobile devices. Based on the above graph, Google’s cost-per-click trends have continued to trend lower. Year over year comps may continue to trends lower.

Cookies, and various other ways in which advertisers track user behavior aren’t effective on mobile devices, and the lack of screen real estate makes traditional display ads defunct in usefulness. Furthermore, the average internet user is spending much more time on mobile devices.

Advertisers are using native advertising to reach a mobile audience, which is basically an advertisement that’s designed to look like actual content. In some instances native advertising is useful, but it’s not targeted enough, and measuring the return on investment from such a campaign is difficult.

However, Facebook may be able to solve this problem, because it has user data, and it can use that data to accurately determine what kinds of ads these users are interacting with, therefore making it easier for advertisers to determine what kind of ads they should display on other websites. Given enough time, Facebook may eventually roll out a whole entire ad network, in which Facebook sells ad space on behalf of other websites, earning a cut of the action. This will be an impediment to Google’s long-term growth, and there’s very little Google can do, as it doesn't have the necessary data to offer a targeted ad buying experience across mobile and desktop.


While Google’s long-term growth trajectory is compelling, qualitative weaknesses on the ad network in relation to competition should be a key concern for investors going forward. It’s likely that the financial performance of Google’s advertising network will become a smaller percentage of the mix, as YouTube, Google Search, and Play Store are extremely compatible with mobile devices. Hence, Google’s core web properties and Play Store revenue have continued to trend higher.

Competition doesn't make Google a deal-breaker, and I think the investment is still a great long-term investment. Furthermore, Google’s growth rate may be supported by new business opportunities, along with growth in pre-existing categories that it will likely remain dominant in. Also, Google’s valuation is reasonable in relation to peers in its space. The industry P/E multiple is 35.61 while Google, in comparison, trades at a P/E ratio of 29.9. Google has a lot of liquid assets on its balance sheet, so its valuation is supported by more than just growth potential.

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