With Google, you never know what news will greet you on any given day. Whether it is a new acquisition or a policy that can set the standard for the industry, the company has taken several steps that will help it continue its climb to break $800 a share for the first time in its history.
So for this trade, I’ll stick to some of the developments that happened last week. These include changes to its AdWords product, which created some criticism. Almost complimenting the AdWords policy changes, the company announced it was partnering with Yahoo (NASDAQ: YHOO) on an effort that should help boost revenues for both companies. Also, the company bought an outfit that should help it improve its e-commerce efforts.
Google is updating AdWords by rolling out enhancements to the popular advertising program. Upon hearing this, we thought, “great way to further improve your position in the increasingly tough mobile marketing area, Google.”
At issue for companies like Google that rely heavily on ad revenue from the Internet is the increasing number of people using mobile devices. They are choosing tablets and smartphones instead of personal computers. This leaves these companies tasked with putting ads on these smaller devices and getting people to click on them as they would on their personal computers.
If you are unfamiliar with how businesses use Google AdWords, it works like this. If you have a business, let’s say a travel agency, you would choose several key words related to the business, i.e. airplanes, travel, etc. You agree to pay Google every time someone performs a search using those keywords and clicks on your ad.
Many business owners report that they have seen their sales rise due to using AdWords, but they also have seen the cost per click increase dramatically over the years. Eventually, some of the smaller business owners start to wonder if they can keep up with the costs. With the changes being implemented now to AdWords, even if business owners don’t care to have their ads on mobile devices, they’ll still have to pay for it, which means they’ll pay higher rates.
Google said the enhanced campaigns allow businesses to better tailor their ads to meet the growing population of people who use mobile devices like smartphones and tablets.
The question becomes whether or not small business owners will take the bite and still use AdWords.
We suspect Google may lose some small business owners. However, given the increased popularity of Internet advertising, the number of business owners that won’t use AdWords anymore because of the policy change will be small. Currently, more than $40 billion of its annual ad revenue come from AdWords.
Partnering With Yahoo!
In the meantime, Google and Yahoo! have partnered in a non-exclusive contextual advertising deal. It promises considerable revenue for both companies within the next few years. This partnership includes Google ads appearing on Yahoo pages and certain co-branded sites using Google’s AdSense for Content and AdMob services.
In a statement released by Yahoo about the partnership it was said:
“Say you’ve been shopping for boots. If you see an ad for boots, that’s instantly going to pique your attention more than an ad for, say, a car battery. That’s better for users. This is why contextual advertising is such a powerful tool.”
The partnership is clearly a win-win for both Google in Yahoo. However, Google stands to benefit more because it will retain a part of the revenues generated from the ads displayed on its partner sites. Last year, Google’s ad sales on its partner sites totaled $12.5 billion, according to Zacks Equity Research.
This partnership has been in the making since 2008, but antitrust issues put it on hold. Yahoo had a similar relationship with Microsoft, but it has been reported that it was not as profitable. When Marissa Mayer took the helm as CEO of Yahoo! last year, it was widely anticipated that the partnership would move forward. She is a former executive for Google.
Lastly is the latest acquisition by Google. For $125 million in cash, Google bought Channel Intelligence. The buy will help Google improve its online sales efforts and e-commerce. It has tough competition in this area, including Amazon. The deal is expected to close during this quarter.
Channel Intelligence specializes in providing companies with tools that tailor a person’s shopping experience. For example, it has a service called “where-to-buy”, in which companies can alert shoppers to where they can buy a particular item online.
Some of Channel Intelligence’s existing customers include Best Buy, HP and Target.
To get an idea of the dollars involved in this area and why it’s so important, consider this. Overall spending on mobile advertising in the U.S jumped 180% last year to about $4 billion, according to eMarketer. It should reach $7 billion this year, and be nearly $21 billion by 2016.
Google already has the most market share when it comes to the mobile ad search space, so buying Channel Intelligence will help it maintain that share.
Google’s moves to bolster its mobile ad revenues are crucial because this space is growing increasingly crowded. Every company worth its salt is trying to position its self to carve out as much of this market share as possible.
Also, these moves should continue the momentum Google has gained. For fiscal 2012, the company reported $50 billion in revenue, which was the highest it’s ever achieved. Also, during the fourth quarter of 2012, it reported earnings of roughly $11.34 billion, which was up from the roughly $8 billion reported in the same period of 2011.
“In today’s multiscreen world, we face tremendous opportunities as a technology company focused on user benefit,” Google CEO Larry Page said on the conference discussing
The company will continue to make strides, and we see no reason why $800 a share will be its peak this year. The key will to continue improving in the mobile space without hurting margins.
I’m suggesting long positions on GOOG under $800 per share. The stock just recently broke near term resistance at $775 and should continue to $860 based on the size of the last retracement in October-November, 2012. On average, GOOG has taken 4-6 months to move that far following prior breakouts and I suspect that will be true this time as well.
Option traders may decide to use the September, 2013 calls at the 790 strike price for $55 per share or less. Because of the cost of the option and the length of time this trade is likely to take to play out, more advanced option traders may consider a diagonal spread with the September, 2013 calls and the short March, 2013 calls with the 785 strike. That trade does run the risk of being in the money by March expiration but if the market does pull back a little in the short-term this could be a great way to hedge that risk while still maintaining a bullish position.
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- The Ticker: goog
- The Trade: Buy at $800
- Target Price: $860
- Trade Opened: February 12, 2013
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