Alphabet Inc (GOOGL) Stock: Will The Shift In Search Trends Hurt Google?

Rising mobile search volume is putting pressure on Alphabet Inc's margins.

Alphabet Inc (GOOGL) Stock Will The Shift In Search Trends Hurt Google

Changes in the way people access the internet are causing some trouble for Mountain View, California-based search engine giant Alphabet Inc (NASDAQ:GOOGL), formerly known as Google. People are no longer waiting to reach their home or office to access their desktops. Rather, more and more people are googling on their mobile devices. More searches are happening on mobile than on desktop. This shifting trend represents both an opportunity as well as a challenge for Google. During the latest earnings call, Google's CFO Ruth Porat mentioned mobile as one of the important growth drivers. However, rising mobile search is also impacting Google's margins. In its latest quarterly earnings release, Google’s parent Alphabet reported a miss on its earnings, largely due to the decline in cost per click, which was impacted by the increase in mobile search.

Google mobile ads get more clicks but make less money.

For a while now, mobile search has been growing at a much faster clip than desktop search. According to marketing research firm, eMarketer, in the United States, mobile search volumes surpassed desktop search volumes last year. The rising growth in mobile search has benefitted Google as it has been able to corner a large part of the mobile search business. According to Digital marketing firm Merkle, Google received 96% of all search-ad clicks on mobile devices in the fourth quarter.

Mobile and desktop search growth

Source: eMarketer

However, the problem for Google is that mobile ads fetch lesser money than desktop ads. Cost per click, or the money google makes every time a user clicks an ad continued to fall in the fourth quarter. Google's strategy for mobile has largely been to either figure out new advertising formats, or generate more money from the much larger volume of impressions mobile devices generate. Until now, Google has been able to offset its declining cost-per-click with more impressions to generate impressive results. But Google will need to figure out a way to improve its cost-per-click on mobile.

Google is facing a rising threat from Amazon Inc.

The predominance of mobile is also changing the way people search. People looking to travel are more likely to search on the Priceline or Expedia app, rather than going through Google search. The same is the story with shopping. People who are planning to buy products are more likely to start their search on Amazon, than on Google. According to a report on Business Insider, Amazon is slowly eating into Google's territory by becoming the go-to place for eCommerce search. Around 52% of people start their search for online shopping on Amazon, and only 26% use search engines like Google as the starting point. While Amazon is currently a tiny player in the ad business with its 2016 ad revenues coming in at $1.2 billion, compared to Google's $79 billion, the rise of Amazon's Alexa could be a serious threat to Google.

Yet another trend which is likely to benefit Amazon is the rise in voice searches. With the arrival of personal assistants like Apple's Siri, Google Allo, Amazon's Alexa and Microsoft's Cortana, more people are finding it convenient to use these digital assistants, rather than typing a question into the search bar. Globally, voice-based searches jumped from almost zero to 10% in 2015 and doubled to 20% in 2016. With more people using voice searches, the importance of devices like Amazon's Echo and Google Home is only likely to increase. And currently, Echo is clearly the more popular device. Also, Alexa is finding its way into devices of several other companies like Ford, and even Google's Android ecosystem for that matter. Chinese firm Huawei Technologies, which manufactures android based smartphones announced during CES 2017 that its flagship handset will come with an app which will give its US users access to Alexa. According to Jan Dawson of Jackdaw Research, "To the extent that voice becomes more important and something other than Google’s voice assistant becomes the most popular voice interface on Android phones, that’s a huge loss for Google in terms of data gathering, training its AI (artificial intelligence), and ultimately the ability to drive advertising revenue,"

Alphabet stock is still a good buy.

The shift in search trends are clearly a concern for Google. However, the company is making several efforts to capture more value from mobile ads. Google recently introduced new tools and features to AdWords to specifically address the consumer shift towards mobile, which will allow it to generate more value from mobile ads. In spite of these rising headwinds, Alphabet stock remains a good long-term buy. The average analysts' price target of $990 indicates an 18% upside for GOOGL stock from the current price.

Kumar Abhishek Kumar Abhishek   on Amigobulls :

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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Comments on this article and GOOGL stock

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Not sure why so many are confused on what Google is doing. Sundar was asked three times and answered three times but analyst still seemed confused.

Two weeks ago Google added the ability to target ads on YouTube using Google data. Most had thought this was already being done but actually no.

Google knows search and everything is going to voice and the assistant. They will use the data collected to target ads in YouTube.

Today search ads are super valuable because they are actionable. Google will take the actionable aspect of search and bring it to YouTube.

Say you own a spray tanning salon. You want to target gingers going on holiday in the next month.

Today advertising with linear TV is extremely inefficient. Targeted ads will grow the pie and make YouTube ads worth far more than today.

Grow the pie because of the inefficiency today advertising is not possible for many companies. A tanning salon without targeted ads makes advertising on TV difficult to impossible.

The more interesting aspect is Google working on ident with DRM. This will allow YouTube to become a streaming distribution platform including offline use.

Content will be locked to your Google Account for offline use. If Google can get content owners comfortable this can be protected they will grow the amount of content available offline.

Using a Google Account there should be far better control on piracy with Google controlling the client environment be it Chrome on Windows or OS X or Android or AndroidTV or Chromebook, etc.

But the key aspect is it keeps Google going with the tide to voice and the assistant. You can NOT try to fight the inevitable because of cannibalization, etc. Instead you must find a way which I believe Google has which I believe will be successful but time will tell.

Are you Glen or "Jack Smith" who replied to an article on AdExchanger ( February 11, 2017?
Do share this awesome post