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Online Ad Strength? Just Ask Google and Facebook

8 November 2013 in Trading Ideas

Whether it’s widgets or online advertising, the math is the same: even if you’re selling something that’s declining in price, you can still come out ahead if you move more merchandise.

This dynamic was a key aspect in Google’s latest profit report – and also a reason that investors appeared to like what they saw. The Internet-search giant said its profit rose 36% on a 12% increase in revenue – a welcome improvement from what was seen as a disappointment just three months earlier.1

The challenge for Google – and all providers of online advertising platforms – has been that ads on mobile devices, which just happen to be where everybody’s eyeballs now congregate, sell for significantly less than those on personal computers.

Of course, Google and its advertising partners know this, too, and now Google has shown a revamped ability to draw clicks that is allowing it to benefit from promotions that reach users via smartphone applications, online news clips or Web browsing on tablets.

Onward Online Ads MotifGoogle’s volume of paid clicks climbed 26% in the quarter, even as the company reported an 8% decline in average costs.

Just as promising for Google: The research firm eMarketer estimates that the company will make up 33% of the global online-advertising market this year, up from 31% in 2011.

That notion that a strong online advertising market equals a strong Google has likely helped the company’s shares climb 15% since its profit report.

Google also comprises a 25% weighting in the Onward Online Ads motif, which is down 15.1% in the past month, and has gained 31.0% so far in 2013.

During those same timeframes, the S&P 500 is up 3.5% and 23.1%, respectively.

Incidentally, don’t feel sorry for Google’s online-ad rival Facebook (a 17% weight in the motif), which is distantly second in global online-ad market share with only 5%. The company’s share has actually outgrown Google in the last two years, and more importantly, Facebook has apparently figured out the mobile ad conundrum – at least as well – and possibly even better — than anyone else.

The company said 49% of its advertising revenue came from mobile devices in its latest quarter. Meanwhile, overall advertising revenue jumped 66%.2

Funny how nobody’s laughing about that IPO anymore.

1Greg Bensinger and Rolfe Winkler, “Google Profit Up 36% as Paid Clicks Swell,” WSJ.com, Oct. 17, 2013.

2Reed Albergotti, “Facebook Status: Big Gains, but Worries Ahead,” WSJ.com, Oct. 30, 2013.