When it comes to digital search giant Alphabet (NASDAQ:GOOG), everyone thinks digital advertising. After all, of the company’s $140 billion in net revenue last year, 85% of it was from Google advertising. As such, it is reasonable to assume that as goes the digital advertising business, so goes GOOG stock.
But digital advertising is just one way to monetize what is Alphabet’s most valuable asset: data. The other way to monetize data is through insights, and this market represents a huge growth opportunity for Alphabet over the next several years.
Broadly speaking, digital advertising involves leveraging user data to create targeted ad campaigns so as to increase brand awareness. This market is huge, but growth is broadly slowing. Meanwhile, insights involves leveraging user data to generate actionable insights for brands to optimize other enterprise decisions outside of advertising, such as product creation, placement and branding. This market is currently small, but could one day be as large as (if not larger than) the digital advertising market.
Hence, when looking at GOOG stock, I no longer think digital advertising. I think insights. Specifically, I think about how much upside GOOG stock has if the company successfully pivots into the insights market.
Insights Is a Huge Opportunity
Digital advertising is a huge market. Globally, digital advertising revenues will total around $330 billion this year, up 17% year over year. But growth in this market is slowing, mostly because digital ad spend now represents nearly 50% of total ad spend globally. Consequently, over the next several years, digital ad growth rates are expected to slow, and drop to below 10% by 2022.
That’s bad news for GOOG stock. As mentioned earlier, Alphabet is roughly 85% digital advertising. Thus, as the digital advertising space slows, Alphabet’s growth trajectory will flatten out too, right?
Maybe not. Data is very valuable and important. Digital advertising is just the tip of the iceberg when it comes monetizing that data. Specifically, digital advertising is data applied to just one enterprise function (advertising). What about all the other enterprise functions? Can data be used to help a company create a better product? Can it be used to help a company optimize its supply chain? Or increase brand equity through better branding decisions?
Yes, yes and yes. If Coca-Cola (NYSE:KO) has data which shows that flavored carbonated waters are trendy, then they will probably develop new flavored carbonated water beverages. Meanwhile, if Nike (NYSE:NKE) has data which shows that consumers prefer shopping at Foot Locker (NYSE:FL) over Dick’s Sporting Goods (NYSE:DKS), then they will probably allocate more product to Foot Locker. Further, if Starbucks (NASDAQ:SBUX) has data that Ariana Grande is super popular among its core demographic, then the company will probably launch a signature drink with Ariana Grande (it already has).
All of these actions fall under the broad umbrella of data-driven enterprise decision-making. Data-driven enterprise decision-making is the future. One day, all enterprise decisions will be made using a data-driven approach. Importantly, data-driven decision-making is the byproduct of data turned into actionable insights.
As such, I think the global insights market projects as one of the biggest growth markets over the next several years. Today, it’s relatively small. Tomorrow, it will likely be far bigger than the $300 billion-plus global digital ad industry.
Alphabet Is Best Positioned to Dominate Insights (for Now)
At the current moment, the company best positioned to dominate this insights market is Alphabet.
Alphabet has the most robust and in-depth consumer data set in the world. They know what consumers are searching for on the internet. They know what links consumers are clicking and interacting with. Beyond that, thanks to YouTube, they know what videos consumers are watching online, and which ones they are liking. Thanks to new product expansions like Google Flights and Hotels, they also know where consumers are traveling — and when.
In short, Alphabet knows a lot. All that knowledge can easily be transferred into actionable insights for enterprises of all shapes and sizes.
Indeed, it already is. Over the past year, Alphabet has built out a product called News Consumer Insights. Broadly speaking, News Consumer Insights takes raw data from Google Analytics, and turns it into useful business intelligence and actionable insights for publishers. This includes telling publishers what stories are trending, which ones are gaining traction, which ones are falling off, so on and so forth, so as to enable publishers to increase readership and engagement.
News Consumer Insights is a subset of what could one day be a far, far larger global insights market. Right now, Alphabet is positioned as the potential future leader of this market given its data advantages, and that means the uptrend in GOOG stock is far from over.
Bottom Line on GOOG Stock
Alphabet’s digital advertising business is slowing. Ostensibly, that’s a big deal for GOOG stock. But, if the company successfully pivots into the insights market, then the slowdown from digital advertising will hardly be noticed by investors.
Instead, insights growth will more than offset digital advertising’s slowdown, and GOOG stock will remain on a winning path.
As of this writing, Luke Lango was long GOOG, NKE, FL, and DKS.
