Baird Equity Research, in their latest look at internet superpower Google, finds largely positive channel checks and is optimistic on the company’s future.  Though they see some possible downside risks including regulatory concerns and the status of Facebook as a ‘walled-off’ area, Google has too much going for it to be too pessimistic.  The highlights of the report are below.

Google Inc GOOG

Channel checks support Q4 thesis. Our channel checks, in particular related to Google’s Product Listing Ads, support our thesis that Google Inc (NASDAQ:GOOG) would benefit from significant growth in PLA, despite overall mixed e-commerce data points. Specifically, Google is now monetizing e-commerce related searches that previously generated free traffic for merchants. While we previously raised our price target on Google Inc (NASDAQ:GOOG) in early December as our top Q4 pick, we remain constructive on the stock with multiple growth levers in the year ahead.

Google Product Listing Ad adoption rate high

Product Listing Ads adoption continues to surge. Our channel checks imply a robust increase in overall spend attributed to PLAs, as a result of increased retailer participation in the PLA auction process. However, shopper engagement levels (and overall return on ad spend) remains mixed as retailers experienced mixed click thru rates, driven by ad quality and shopper education. For PLA-specific datapoints from Marin software, Kenshoo, IgnitionOne, and ChannelAdvisor.

Search advertising spend remains stable. Ignition One reported that search spend in Q4 2013 was +12% Y/Y, slightly below the 13% growth rate reported in Q3, but implies a continuous improvement vs. “mid-single-digits” spend growth reported in 1H:13. We’d note that Y/Y comps were modestly tougher in Q4 for Ignition One. Per Kenshoo, paid search spend accelerated to 34% Y/Y growth in November, driven by shortened shopping season, but expected softer spend trends post-Thanksgiving. All in, we believe, search advertising spend remained stable, driven by robust holiday shopping trends.

Per-unit ad pricing remains soft

Mixed results from Enhanced Campaigns, so far. We believe roughly 15-20% of total ad spend in Q4 was targeted toward mobile devices (smartphones and tablets), with Google Inc (NASDAQ:GOOG)’s shift to enhanced campaigns likely being a significant driver as advertisers are now automatically opted in to tablet and phone targeting by default within the AdWords program. However, per-unit ad pricing remains soft, largely driven by click-thru rates, as mobile ad spend remains driven by traffic growth.

Google Inc (NASDAQ:GOOG)’s share of search market remains stable. Per comScore, Google’s share of desktop search market remained largely stable in October and November around 67%, followed by Microsoft Sites with 18%, Yahoo! Inc. (NASDAQ:YHOO) with 11%, Ask Network accounting for 2.6%, and AOL at 1.4%. Per StatCounter, Google Inc (NASDAQ:GOOG) has roughly 88% share of mobile search queries, followed by Yahoo! Inc. (NASDAQ:YHOO) at 8% and Bing just shy of 4%.