At its heart, Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) is all about advertising. The search engine’s sophisticated algorithms and web-enabled ads have become the standard for many firms looking to get their message into the hands of consumers. And as one of the first to exploit the web, the internet giant has carved out a dominant position, driving up GOOGL stock.
Plus, those ad sales generated billions in cash flows and have allowed the firm to expand into other areas such as home goods and self-driving cars. The problem is, online ads may be too good of a business.
Once unimaginable, Google stock faces some stiff competition from other dominate tech players and even a retailer or two for ad-spending dollars. Subsequently, Alphabet has seen its market share in ad spending dip substantially.
But investors in Alphabet stock shouldn’t fret: the firm has a plan to get those ad dollars back and tap into its big competitive advantage. Over the long haul, this strategy could show shareholders exactly why Google is the king of the online advertising pile.
GOOGL Stock and Unexpected Competition
At first glance, Walmart (NYSE:WMT) doesn’t seem like competition for Google stock. Nor does Amazon (NASDAQ:AMZN). After all, they are retailers, not search engines or productivity-related Software as a Service (SaaS) firms. But the duo — along with other retailers and firms — have emerged as big players in the world of online advertising.
The key comes down to sponsored ads on their websites.
Both AMZN and WMT allow vendors to bid their products alongside various related search terms. Search for “fabric softener” on their home pages and you’ll see Downy listed as a top choice. The thing is, Proctor & Gamble (NYSE:PG) paid for that listing. What’s great for WMT and AMZN is that it doesn’t matter if you actually click and buy Downy; they still made money off the ad.
It turns out, advertisers love this. The reason is simple: you’re already on a platform to purchase the product. If you search for fabric softeners on Google, you still need to go to another website to make the purchase. And while Google does have shopping listings on its page — including Amazon and Walmart — there’s still the click through. By cutting out that middleman, vendors have been able to realize greater product-purchase volume from consumers.
For Alphabet stock, this has meant trouble. Last quarter, ad revenue growth took a huge dip. The firm recorded its slowest pace of growth in nearly three years. Google only reported a 15% increase in ad spending versus 24% for the previous year. The reason was clear: competition from other channels negatively impacted results.
Data from research firm eMarketer shows that Amazon’s ad business is stealing market share bit by bit. AMZN is expected to capture about 8.8% of ad share this year, up about two basis points. Analysts expect Alphabet to incur one point of market share decline, which hurts prospects for GOOGL stock.
Google Fights Back
For Alphabet, losing the ad cash is a major issue. That’s what drive its “hobby” businesses. Despite the name, these side projects such as Gmail and Google Drive have gone on to be major contributors to the firm’s bottom line.
Moreover, Google is rolling out a new set of advertising options to lure in customers. Importantly, these options will focus on its mobile services. In the Google App, the Discovery feed will receive ads for the first time, featuring gallery-style iterations that users can swipe through. Secondly, these Discovery ads will place tailored sponsored posts in searches. Elsewhere, promotional ads will now dot Google Images searches as well as YouTube feeds and Gmail inbox tabs.
At first, it’s easy to say, what’s the big deal? Here’s the thing: Amazon, Walmart and others like them don’t tread here. People now use their smartphones for everything, from directions to finding the perfect GIF response to a Facebook (NYSE:FB) post. It’s here that Google has a major advantage over Amazon. It’s still the most powerful and popular search engine.
By tapping into some of these other channels, Alphabet can get their ad dollars back. In turn, the move can boost GOOGL stock. Plus, the strategy allows Google to court more service businesses. A lawn-care company isn’t going to advertise on Walmart.com, but they would on a relevant YouTube video.
By adding ads here, Google has the potential to slow its ad-revenue decline and even fight back on the market-share front. Now, it’s too early to tell if the moves will pay off, but the chances are really good. No one does what Google does across the web and increasingly the mobile internet. This provides plenty of opportunities for the firm to get more ad revenue back.
Don’t Count Out Google Stock
Just like Amazon tapped into its advantages to seek ad revenues, Alphabet is doing the same. By expanding its suite of ad options to include more of its mobile operations and services, Google has a powerful weapon to get its mojo back on track. And given the recent declines in GOOGL stock — including its big double-digit dip due to disappointing ad revenues — investors have a compelling contrarian opportunity.
Disclosure: At the time of writing, Aaron Levitt was long AMZN stock.
