Alphabet Inc (NASDAQ:GOOGL) tacked on roughly 7% in gains for May to clock in just under $990, and is rapidly closing in on the $1,000 psychological mark. Amazon.com, Inc. (NASDAQ:AMZN) touched their first, but there’s little doubt that a clean break of the four-digit figure would mean big things for GOOGL stock.
Alphabet has its impressive Q1 earnings beat in April 27 to thank for the strong momentum. Not even news that its search division, Google, will soon bring an ad-blocking feature to both the desktop and mobile versions of its popular Chrome browser have dampened the mood at the bull camp.
The headline received very little attention at the time, but with GOOGL stock at all-time highs, it’s worth diving into potential threats.
Alphabet Is Protecting the Gravy Train
The last time anything of those seismic proportions happened in the advertising industry was back in 2015 when Apple Inc. (NASDAQ:AAPL) made good its threat to allow third-party ad-blocking extensions on iOS 9 and future operating systems.
At the time, GOOGL stock tanked nearly 5% in response.
The ad blocking feature looks like Google is shooting itself in the foot, at first glance. Though it’s far from clear what shape or form Google’s ad-blocking tool will take.
One option though would be to block all ads from any site that carried even a single offending ad. The company could work with the Coalition for Better Ads to determine which ads don’t meet the cut, meaning most pop-up ads, auto-play videos and some countdown ads including YouTube’s pre-roll ads would likely be cut off.
Google says it’s still ironing out the details regarding whether the feature will be enabled by default — if it ever comes to pass.
There are two key reasons why GOOGL would want to take such a controversial move:
- To create a good user experience
- To preempt the proliferation of third-party ad-blocking tools.
This will not be the first time that Google will be going to extreme lengths to protect its advertising gravy train. Anybody remember the AdSense Conspiracy? Maybe you don’t, but the long and short of it is that a couple of years ago Google literally banned thousands of publishers from its lucrative AdSense program in a bid to get rid of publishers who were gaming the system through illegal practices such as click fraud.
Google says it found it necessary to weed out the bad actors, including those who were buying lots of low quality traffic (read: clicks that convert poorly and offer little returns to advertisers) in a bid to preserve the integrity of its display network.
Is Ad Blocking Really a Threat to GOOGL Stock?
Basically, it’s the same script here, but with a different cast.
Google is well-aware that too many offending or irrelevent ads create a bad experience for end-users and lead to poor ROI for advertisers — all of which can badly backfire on the company. We saw that in March when giant brands and advertisers including AT&T Inc. (NYSE:T), the British government, PepsiCo, Inc. (NYSE:PEP) and Wal-Mart Stores Inc (NYSE:WMT) pulled their advertising dollars from Google after their ads were featured on YouTube videos posted by extremists.
Alphabet ostensibly wants to avoid a repeat of the same, and also to make sure extremists don’t get paid in the future.
But a far more subtle reason could simply be that the use of third-party ad-blocking tools has become so prevalent that GOOGL wants to preempt their use by providing users with its own tool. You could liken it to putting a gun in a gangster’s hand.
But in Google’s case, there’s a method to the madness. Unlike third-party ad-blocking tools which block all ads indiscriminately, Google will have direct control over its blocker, and will apply a more surgical approach over what gets blocked and what doesn’t.
Just how prevalent are ad-blockers? Probably much more than you imagined. A 2016 survey by the Interactive Advertising Bureau (IAB) found that a whopping 26% of desktop users and 15% of mobile users regularly use blockers to remove ads from publishers’ websites. A similar survey done two years earlier by Adobe and PageFair found that 144 million people, or 5% of all Internet users, employed the tools.
That suggests that the practice is quickly becoming more popular.
Alphabet Will Be Just Fine
You wouldn’t be able to tell that by looking at Alphabet’s top-line growth.
When Google started banning rogue publishers from its AdSense program in 2012, the effects were palpable because AdSense revenue growth fell dramatically from 20%-plus to nearly zero — at least for a few quarters.
Apple brought its ad-blocker to Safari during the fourth quarter of 2015. But Google revenues accelerated over the ensuing quarters, from the mid-teens to 20%-plus? What does this tell us?
A possible inference is that advertisers are now creating cleaner and more effective ads because they know the user has the power to reject those cheesy ads. It also could mean that more publishers now trust whatever ads are being served by Google, which has resulted in more joining its ranks. Indeed, Google’s aggregate paid clicks growth surged from 26% in Q1 2014 to 44% during Q1 2017.
Ad blockers appear to be having the opposite effect of what investors had feared, or at the very least, they’re not doing much to slow things down.
If that’s the case, then what you do with Alphabet going forward has to do with whether you think Google can keep innovating its way to smarter and better ad service. And considering Google is looking to bring AI and machine learning to improve its ad targeting, now looks like the time to go long GOOGL stock if you haven’t already.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.