Alphabet is set to release Google’s Q4 2015 earnings on Monday, February 1st. In Q3, the company reported that its revenues grew by over 13% year over year to $18.7 billion. However, cost-per-click, which has been declining for the past two years, continued to negatively impact growth. This decline has been largely due to the advent of smart phones that enable users to search for content through locally installed apps. As a result, advertisers are allocating less ad dollars for mobile search. Nevertheless, Google’s management continues to look for ways to improve its mobile revenues, and has recently introduced deep links for mobile apps to surface mobile content during search. Additionally, it is focusing on improving its revenues from YouTube’s video display ads and its programmatic ad platform. Therefore, in this earnings announcement, we expect the programmatic platform to once again drive revenue growth across its mobile and PC search and display ads divisions. And we expect greater clarity on nomenclature, as parent and holding-company Alphabet discusses the performance of both Google and is smaller, sister businesses.
Ad Volume To Boost Revenues Despite Decline In Cost per Click
We currently estimate that PC search ads and Mobile search ads respectively contribute approximately 42.6% and 28.3% to the firm’s value. The company, with a 65% market share, dominates the PC search engine market. The cost per click, a metric that measures the price paid for the number of times a visitor clicks on a search ad, has been on a steady decline for the past few years. The primary reason for this has been the advent of programmatic buying that matches relevant ads with content, an increase in user-generated online content, and the increasing use of smartphones that have a lower engagement rate. As advertisers realign their ad budgets in favor of mobile devices, and that too through programmatic platform, chances are that desktop revenue per search will suffer. As a result, the company’s top line growth from search ads has failed to match the growth in search volume. We believe the downtrend in RPS (a derivative of CPC) continued in Q4, and expect the company to report lower RPS, accordingly. Currently, we project RPS to decline from $23 to $22 by 2022.
Even though CPC will decline due to advent of mobile usage, the company is adopting novel ways to boost revenues. It has introduced deep links for mobile apps to surface content for mobile apps. The new tool will also help boost revenue for programmers developing Android apps and streamlines the process to promote applications (and its content) across Google search. We expect that ad revenues will grow in absolute numbers buoyed by growth in search volume across mobile. Alphabet’s Google, with 90% market share, dominates the mobile search engine market. One of the key reasons for this dominance is its flagship Android OS, which has witnessed excellent adoption and deep penetration in the smartphone market. Recently, it was revealed that Google generated revenue of $31 billion and $22 billion in profit. Considering the widespread use of Android based smartphones, we expect revenues from mobile ads will have grown at a robust pace in the Q4 of 2015.
Video Ads To Boost Revenues From YouTube
According to our estimates, YouTube contributes approximately 3.3% to Alphabet’s value. Online video advertising revenues are estimated to rise to $19 billion by 2017. According to comScore, Alphabet’s Google is the market leader in the online video content industry. The November 2015 U.S. desktop online video rankings by comScore confirm this as Google Sites (led by YouTube) saw 174.5 million unique viewers. According to comScore, Google’s sites are also ranked as one of the top video ads web properties in the U.S., reaching 33% of the audience. YouTube is forecast to a record 3 trillion video views during 2015. Since online video remains a fast growing segment within the overall digital ad market, we expect this to translate into a high revenue growth rate for the company. We expect that the unique user count for YouTube rose during the quarter, given the increasing popularity of this platform.