Google Inc’s Advertising Empire Is Not Threatened by Amazon.com, Inc.
Alphabet Inc (NASDAQ:GOOG, GOOGL) is still recovering from its “YouTube” controversy that led to a few big brands pulling off their campaigns, hurting Google stock. The company has taken concrete steps to overcome this challenge and this could bear fruit in the coming days. “YouTube TV” has already been launched and is expected to become popular with cord-cutters.
But the focus of GOOG stock investors still seems to be on the reports in the media that suggested that Amazon.com, Inc. (NASDAQ:AMZN) could be the next big thing in digital advertising. This would threaten the dominance of Alphabet-owned Google, which together with Facebook Inc (NASDAQ:FB), controls the majority of U.S. digital advertising revenue. So, should Google stock investors be worried?
The answer is an emphatic “NO.”
These two have evolved as totally different beasts, and if there is no one like Amazon, then there is no company like Google either. If Amazon is continuously innovating and taking on the world, then Google-parent Alphabet is building on its strengths and takes pride in being an unconventional company. Just mention “Search,” “Android,” “Maps,” “Chrome,” and YouTube, and you know that Alphabet’s competitive edge is too strong to be taken away by Amazon. Moreover, the growing cloud strength makes Alphabet Inc a tougher rival to Amazon in the coming days.
Amazon and Product Searches
Amazon has taken over the retail space with a bang and even stalwarts like Wal-Mart Stores Inc (NYSE:WMT) are having a hard time figuring out how to get back in the game.
Alphabet mentions in its annual reports that the company faces competition from vertical search engines and e-commerce websites, such as Amazon and eBay Inc (NASDAQ:EBAY). This is because users can go directly to such websites rather than go through Google. So if you are searching for a product, you might directly go to Amazon.com and search for it instead of going to Google.
And a few analysts point out that this is where the big opportunity for Amazon lies. Even Sir Martin Sorrell, WPP head, said last month that the online retail giant was a big threat to Google’s search business. However, almost everyone agrees that it will be a long while before Amazon can reach the scale that Google is at.
eMarketer predicts that Amazon will generate $1.0 billion in ad revenue in the U.S. in 2017 as compared to estimated revenue of $34.0 billion generated by Google. (Source: “The CEO of the world’s biggest ad company says Amazon – not his 3-month old daughter – is what keeps him up worrying at night,” Business Insider, March 3, 2017.)
The most important factor is that the company dominates in mobile search, which is likely to continue to post high growth in the coming years. But the most under-reported Google property that has huge potential for revenue growth is YouTube.
YouTube to Power Google Stock
There are also estimates of Amazon earning up to $5.0 billion in ad revenue by 2018. However, whatever the range of these estimates, they are still far behind where YouTube is today. YouTube accounts for almost five percent of the American online advertising market at present, the level which Amazon is expected to reach in about four to five years. And at that time, YouTube would be accounting for about nine percent of the U.S. online ad market. (Source: “Amazon’s advertising business could reach $5 billion in revenue in 2018,” Business Insider, April 6, 2017.)
YouTube is a huge platform and clearly the biggest search engine after Google, that includes YouTube videos in search results. Even if Google ad revenue growth is expected to slow down in the coming years, YouTube is just getting started. The current controversy has dented GOOG stock, but it is not likely to continue for long because the company is trying to solve the problem as early as possibe.
Alphabet Inc’s Superior AI Technology
Google has resorted to artificial intelligence and machine learning again as it tries to solve the problems surrounding objectionable content on YouTube. Due to its dominance in search, it has been working on its market-leading AI for long. The company also entered the market with its AI-powered digital assistant that competes with “Amazon Alexa.”
Although more time is needed to check if “Google Assistant” turns out to be a better choice than Amazon Alexa, there are a few indications that the Assistant may have a lead. (Source: “Google Home Vs Amazon’s Alexa: 54 Questions, 1 Clear Winner,” Forbes, April 6, 2017.)
However, the more important thing to consider is if Alphabet Inc can beat Amazon.com, Inc. in the cloud, where the latter dominates. Given the way things are moving, there could be better days ahead for “Google Cloud,” which will grow on the strength of its superior AI.
Just last week, Google shared more details and benchmarks about its custom chips that accelerate its machine learning algorithms. The custom chips, called “Tensor Processing Units” (TPUs), are about 15x-30x faster in executing Google’s regular machine learning workloads than a standard GPU/CPU combination.
TPUs allow the company to make predictions very fast and enable product response in fractions of a second. This is expected to take Google AI and Cloud to the next level and bodes well for Google stock. (Source: “Quantifying the performance of the TPU, our first machine learning chip,” Google Cloud Platform Blog, April 5, 2017.)
The Bottom Line on Alphabet vs Amazon
If Amazon can dominate in product searches then it is equally likely that Walmart, which is leaving no stone unturned in building its online business, shall also compete for that market share. But Google-parent Alphabet does not get impacted by these developments in the e-commerce space as it has its hands full with YouTube, mobile search, and other bets. So there is no need for Google stock investors to worry as there are a number of exciting growth areas lined up ahead and Amazon will be facing increased competition, both in the e-commerce space as well as the cloud.
The one big factor in favor of Amazon is Jeff Bezos, who has made his company far more agile and quick to benefit from its business potential. This is something that Alphabet needs to learn from the retail giant if it wants to stay ahead in all its businesses, not only from Amazon, but also from the other emerging rivals. This shall be the most important driver for GOOG stock in the near future.