Why Google Stock Fell despite Robust Ad Revenue Growth
Google’s paid clicks see robust growth
While Alphabet’s (GOOG)(GOOGL) ad revenue saw robust growth, the company’s future may not be as rosy. The global shift from desktops to smartphones has led to an increase in fees the search engine pays to handset makers such as Apple (AAPL) for it to be the default search engine on their handsets.
Traffic acquisition costs (or TAC) are the costs of revenue for search engines. TAC is a critical number for industry watchers. Alphabet’s TAC, including payments to partners such as phone makers and websites on which it displays ads, rose 28% YoY (year-over-year) in fiscal 2Q17 to $5.1 billion.
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Google’s TAC on the rise
Google’s TAC have caused a 23% YoY fall in revenue per click, despite a whopping 52% YoY increase in paid clicks. TAC represented 22% of Google’s advertising revenue in fiscal 2Q17, compared with 21% in 2Q16. This trend is likely to hurt the company’s bottom line. The company’s stock fell 3.1% in after-hours trading, as increasing TAC are worrying Wall Street. Its operating margin narrowed from 27.8% in 2Q16 to 26.4% in 2Q17.
Google leads the digital ad space. The search engine currently represents 33% of global digital ad revenue, according to eMarketer. Facebook (FB) is a distant second, with a 16% share.