The U.S. mobile ad market is expected to double by the end of 2014, according to eMarketer. This surely throws a large number of opportunities to the technology players such as Google (GOOGL, Financial). The growing ad industry is one of the key reasons why Google’s share price has appreciated by 180.8%, over the last 5 years, and by 32.7% in the last one year.
However, the company is having to face some headwinds because of the growing popularity of smartphones and tablets, which does not provide less space for ads as compared to desktops and laptops. This has resulted in lower prices paid by advertisers for every click made by users. This was one of the factors which affected Google’s second quarter results. Nonetheless, the company managed to post decent numbers, enabling its share price to surge.
Analyzing the quarter
Revenue surged a whopping 22% over last year, clocking in at $15.96 billion. This was much ahead of the estimate of $15.6 billion. Excluding payments to advertising partners, net revenue stood at $12.71 billion, an increase of 14%. Although paid clicks jumped 25%, cost per click decreased by 6%. However, this is not the first time. Google is witnessing lower cost per click, paid by advertisers, for quite some time now.
In fact, price per click on Google sites stood at $1.84 and for the network sites at $1.33. The prices had declined 5.5% and 6.5% for the Google and the other network sites, respectively.
Moreover, revenue from Google’s own website climbed 23% to $10.94 billion. This resulted in a higher top line since it makes 69% of the total revenue of the company. Similarly, revenue from other networks rose 7% to $3.42 billion.
Getting deeper
Further, the bottom line surged to $6.08 per share, 6% higher over the prior year. However, it failed to meet the analysts’ estimates of $6.23 per share. The miss on earnings was mainly due to higher costs of operation and new technological advancements, such as internet-connected wearables and robots. Also, the company has added 2,200 employees during the quarter, which increased the employee cost over last year.
On one hand, Google is expanding its capacity in order to grow its business and on the other hand, its peer Microsoft Corporation (MSFT, Financial) is on the verge of shrinking its workforce. Microsoft recently announced that it plans to lay off 18,000 workers during this year, in order to reduce its costs.
However, both the companies are on an acquisition spree. They plan to strengthen and expand their businesses by acquiring other smaller companies. For instance, Microsoft recently acquired InMage Systems Inc., which provides disaster recovery service. Through this buyout Microsoft expands into data protection services.
Even Google has made a number of acquisitions, namely Titan, Aerospace, Skybox Imaging and lastly Nest Labs. All of these are purchased in the first half of this year, expanding its reach into satellite service and drone-making.
Key takeaway
The acquisitions will definitely help Google grow its business in the long run. Also, it is expanding its current capacity by adding to the existing workforce. These factors, coupled with growing revenue and technological advancements, make the company an interesting bet. Google should be an all-time favorite pick for investors.
