How Alphabet's Recent Ad Strategy Will Impact Search Revenue

The recent desktop search changes made by Google, which reports under Alphabet Inc GOOGL GOOG, are likely neutral to positive for desktop search revenue as higher paid clicks are offset by potentially lower pricing, according to Cowen analyst John Blackledge.

Last month, the company announced changes to desktop search results, going to four text paid search ads at the top of the page versus three prior for "highly commercial" searches and moving product listing ads (PLAs) to the right hand rail.

"Price (CPC) could decline modestly given an extra ad up top and also higher click-through rates for the 4th ad will positively impact the Quality Score, which lowers an advertisers cost per click; though that could be offset by advertisers that were in slots 5 or below making higher bids to get in the 4th ad slot," Blackledge wrote in a note.

On the other hand, the analyst said paid clicks should rise given the addition of the fourth top-of-page ad slot added to commercial searches.

The latest move from Alphabet is part of its effort to unify the desktop search results page with mobile. For instance, mobile does not have any right hand rail text-based search ads. The changes appear to be an effort to increase paid ad coverage as desktop search volume flattens and/or declines over time, with search volume growth driven by mobile.

Blackledge, who has an Outperform rating and $940 price target on the stock, has updated his stock buyback forecast. The analyst now expects share repurchases of $2 billion in 2016 and $1.7 billion in 2017 versus earlier estimate of $3 billion and $700 million, respectively.