Mobile To Drive Google Ad Revenue Growth

  • Google unveiled the next version of its mobile OS, Android L, at the I/O conference.
  • The OS will close the gap on iOS in terms of performance and user experience, which will help to consolidate Android’s market share as a mobile OS.
  • The consolidation of Android’s market share will help drive Google’s mobile ad revenues and digital content sales on the Android Playstore.

Google launches Android L

Mobile is the next battleground of online companies which make money through ad sales. Google (NASDAQ:GOOGL), Facebook, Twitter and Yahoo are each fighting to get a larger pie of this market. Each of them has been actively focusing on the mobile platform to leverage the rapid growth in the market.

While Facebook has unbundled apps to improve user experience on the mobile platform and collect greater amount of information through multiple apps, Twitter acquired MoPub ad exchange, Namo media and SnappyTV to align itself to mobile. Yahoo’s focus on native advertising and app revamps has attempted to kick start the companies sagging operations through focus on mobile. Google I/O was all about android and focus on mobile and wearables as it unveiled the latest version of android, L as well as android wear. So why are these companies so focused on mobile?

Mobile advertising market rapidly growing

We are in the midst of a smartphone revolution as smartphones and tablets are rapidly replacing the PC as a default device to connect to the internet. With larger screen devices like phablets coming into the market, this trend could accelerate.

Given the increasing trend of smartphone usage, mobile advertising revenue has been taking up a greater share of the total digital spend year after year for the last few years. According to a report from emarketer.com, the trend is expected to continue over the next few years, which is in line with smartphone usage growth.

online advertising spending worldwide

The rapid growth in the market explains why each of the big online technology companies are focusing and embracing the mobile platform.

Android ‘L’ is Google’s lever to drive mobile ad revenue growth

Google unveiled the latest version of its Android platform, Android L, at its I/O conference on June 25th. Our earlier post on Google highlighted the UI and performance improvements in L, leading to a better user experience closing the gap on the iOS. Google also announced Android One, a program aimed at providing stock android experience on lower end devices targeted at the emerging markets.

These are moves which could help Android further consolidate its position as the leading mobile O/S. It is no secret that today Google makes far more money from iOS users than it makes from android users, but having a greater number of users on its own platform will provide Google with a scale that will be hard to replicate. Also Google will surely be the default search engine on android as compared to iOS where it faces the risks of Apple teaming up with some other search engine service provider. Therefore, having a greater number of users on Android platform could lower risks to Google’s future mobile ad revenue. As a result Google’s mobile ad revenue growth will be more secure.

Another tangible benefit of expanding the android presence will be a direct impact on Google’s other Income, which comprises mainly of device sales and digital content sales through Play store. Other revenue has been on a sharp growth curve, which will continue with the expansion of Android platform. The chart below displays the growth rate of the android platform over the last 5 years in relation to the growth in Google Non-core revenues.

google non core revenue growth

Android market share as reported by statista.com

Google does not break down ad revenue by source, but emarketer’s report on digital mobile advertising sales provides an insight into Google mobile advertising revenues.

2012

2013

2014

Total internet mobile ad market (in billions of $)

8.76

17.96

31.45

Google share (%)

52.60%

49.30%

46.80%

Google share (in billions of $)

4.61

8.85

14.72

Source: emarketer.com

Google’s launch of L will help to consolidate Android’s market share as the leading mobile OS, and provide a moat to Google’s mobile advertising revenue apart from fueling greater growth in Google’s revenue from digital content sales on its Play store.

In conclusion, Google’s launch of L helps Google better leverage the smartphone revolution, and boosting mobile advertising revenue, which will drive Google’s core revenue stream over the next few years. Revenue from Google play store and digital content sale will also be driven by the consolidation of Android OS.

The current valuation multiples of Google, price-to-earnings multiple of 35.2 and price-to-sales multiple of 6, though pricey are justified by the long term prospects of the company. Given the strong returns generated by the company, we reiterate our positive long term outlook on Google stock. See our complete Google stock analysis.

To see Google’s latest stock price movement, click here (NASDAQ:GOOG)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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