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Could Alphabet's New Ad Unit Drive Faster Revenue Growth?

Could Alphabet's New Ad Unit Drive Faster Revenue Growth?
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Google, owned by Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL), is said to be testing a new fourth mobile ad unit in higher monetizing and cost per click categories, including finance, legal and travel.


"GOOGL continues to innovate and optimize its monetization, and like the third ad unit last year, we see this potentially leading to faster ad rev growth, even through tough Y/Y growth compares," Morgan Stanley analyst Brian Nowak wrote in a note.

Of the 250 mobile queries sampled in these three categories, roughly 65 percent displayed four mobile ad units. "Legal had the highest penetration of four mobile ad units (69 percent), followed by Finance (64 percent) and Travel (61 percent)," according to Nowak.

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Nowak recalled that the addition of a third mobile ad unit boosted the Websites ad revenue growth in the third quarter of 2015.

"If GOOGL is adding an extra ad unit in these highly commercial categories it is likely to be a tailwind to core Websites growth. This change speaks to how GOOGL continues to take steps to improve its search monetization — in this case by again reducing organic search visibility by pushing organic search links further down the results page," Nowak continued.

"This, combined with searchers' higher probability to click on links toward the top of the search results puts more pressure on companies to spend in GOOGL's search auction market," Nowak added.

The Beginning Of Something New

If this is the start of a new ad unit, as the analyst anticipates, the extent to which it is rolled out in 2H2016 should help Alphabet continue to grow through the difficult Websites year-over-year growth compares in the near term.

Furthermore, Nowak said, "the company's focus on innovation and monetization of its 1 billion plus user paid search business (Product Listing Ads, Extended Text Ads, Customer Match, Google Maps, Extra ad units, etc.) enabling it to continue to deliver 20 percent plus annual Google Websites growth into 2017."

Retail Left Behind

Of note, Morgan Stanley's work suggests Alphabet does not appear to be testing a fourth mobile ad unit in the retail category, "as product listing ad units remain the dominant ad unit."

Nowak maintains an Over-Weight rating and $865 price target on Alphabet (GOOGL)'s shares, which closed Tuesday's regular trading session at $753.41.

Ratings data available on Benzinga Pro.

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