Google Targets Search Apps for Mobile Phones

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- Google ( GOOG) has introduced mobile search ad formats for mobile apps.

This announcement comes soon after its third-quarter earnings report in which its search business delivered a strong performance driven by growth in mobile searches. The introduction of contextual search ads within apps can generate meaningful ad revenues for the company in the future. Google's mobile operating system (OS) Android already has a majority market share of around 50% in mobile search market.

Google leads the Internet search market globally with a market share of an estimated 68%, far higher than the market shares of AOL ( AOL), Yahoo! ( YHOO) and Microsoft ( MSFT) combined.

Our complete analysis for Google's stock is here.

Google's new contextual ads, or "Custom Search Ads" as it is called, allows searches for information within a mobile application, and developers will likely make more money through these custom search ads, according to the company. Another ad format is "Click to Download" that connects directly to the app store or Android Marketplace, when a search for a mobile app is made on Google.

In addition, Google has also introduced "Mobile App Extensions" that enables businesses to use mobile search ads to direct consumers to a page within a mobile app already installed on their smartphone. Google explains this in its blog: "if someone searches for sneakers on a mobile device, they might see an ad that takes them directly into a cool shopping app they've installed on their phone."

Mobile Ad Revenues to Drive Future Growth

In the third quarter, Google posted a 28% increase year over year in paid clicks (the number of times Internet users click on Google ads) and a 5% increase year over year in cost per click, the price that advertisers pay Google for each user click. A rise in mobile searches is a prime factor for this growth and the introduction of Custom Search Ads will further the company's search ad revenues in the future.

We estimate that Google revenue per search (RPS) -- a function of the click-through rate (CTR) on ads and CPC -- has declined over the last few years (as seen in the chart above) due to higher search volumes in lower RPS generating verticals like entertainment, local ads and consumer products, as well as increasing international mix in overall searches.

While we estimate Google's revenue per search (per 1,000 searches) will decline from $13.80 in 2012 to $9.84 by the end of our forecast period, Trefis members expect a smaller decrease from from $15 to $13.50 during the same period. The member estimates imply an upside of 22% to the Trefis price estimate for Google's stock.

We currently have a Trefis price estimate of $628 for Google's stock, about 8% above the current market price.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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