Online advertising remains the core business for Alphabet’s (NASDAQ:GOOGL) Google. Despite all the smartphones, smart speakers, smart thermostats and self-driving cars, it’s online ad revenue that drives GOOGL stock.
However, a new report suggests Google’s share of that online ad revenue is being threatened by an unlikely source: online retailers. Companies like Amazon (NASDAQ:AMZN) are increasingly turning to selling ads on their websites, and the practice is proving to be lucrative to both the retailers and the product manufacturers buying the ad space.
There are real implications for GOOGL stock if this trend continues.
Report: Retailers Going After Google’s Ad Revenue
There is a very interesting report published in Reuters today that highlights a growing trend for online retailers to sell ad space on their websites. The practice can be lucrative for the retailers, and it is proving to be very attractive for the advertisers. In fact, the money invested in an ad campaign on a retailer website can be more effective than spending money on an ad campaign with Google or Facebook (NASDAQ:FB).
As when searching on Google, customers can search for products on a retailer website using key words. The two platforms have that in common. But retailers have an added advantage. Customers have products in their shopping carts, and return customers have a shopping history. The retailer knows exactly what products they buy –not just search for– and can then target advertising very effectively based on this data.
One example cited was a recent campaign run on Target’s (NYSE:TGT) website. Based on shopping history (whether one had recently purchased anti-allergy medication or allergy treatment products), the company would display ads for a Dyson vacuum cleaner. The result showed Dyson vacuum sales doubled among customers in that allergy group.
Selling advertising on their websites not only helps online retailers to boost their overall sales, it is becoming increasingly lucrative as a source of high-margin revenue. Reuters says Amazon’s ad revenue hit $2.8 billion in 2017 and that is predicted to jump to $6.6 billion by 2019.
Potential Fallout for Google Ad Revenue and GOOGL Stock
GOOGL stock is so valuable because the company practically mints money with online ad revenue. It has been working hard to diversify, notably with an expansion into hardware sales, including the Pixel smartphone, Google Home smart speakers, Chromecast media streamers, Nest smart home products and Pixelbook laptop — in addition to cloud services and “Other Bets” like Waymo self-driving cars.
Despite those diversification efforts, in its latest quarterly results, advertising accounted for $28.1 billion of the company’s total $32.7 billion in revenue. That’s 86% of Google’s revenue coming from online ads.
Reuters’ numbers forecast Amazon’s share of the global spend on online advertising to rise from 1.5% in 2017 to 4.5% in 2023. Google’s marketshare is predicted to slide from over 40% to 35% during the same time period.
Looking at those numbers, trends and forecasts, it’s not difficult to see the potential for trouble ahead for GOOGL stock. When 86% of the company’s revenue comes from online ads, but its share of the worldwide spend on online advertising is shrinking as retailers like Amazon push into the business, that’s not good news. It’s not just competing with social media giants like Facebook for ad revenue, GOOGL now has to contend with online retailers who are ramping up efforts to monetize their detailed shopper data. Ads were big, easy money for a long time, but competition for advertiser dollars is only going to get more intense.
Google could cut rates to counter the retailers’ efforts, but the big picture is this trend puts even more pressure on Google to accelerate its diversification.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
