In early February 2013, Google Inc (NASDAQ:GOOG) announced significant changes to the AdWords program, the monetization engine behind its search platform. The changes are expected to be fully implemented on a global basis by late June 2013, with ad-buyers already having access to update their existing campaigns. Near-term, Google Inc (NASDAQ:GOOG)’s actions appears to be focused on re-aligning pricing on overly discounted tablet inventory and attracting advertisers that were previously not buyers. Research firm Credit Suisse’s analysis suggests that in the near-to-medium term, the enhanced campaign roll-out could drive ~100 bps of revenue growth in FY13 and ~300bps in FY14.
However, analysts from Credit Suisse also believe this change is motivated by a far broader longer-term strategic objective as Google Inc (NASDAQ:GOOG) seeks to accelerate the rate at which website owners optimize their sites for tablets and smartphones. Analysts note that the open connectively of the web is an enabler of Google Inc (NASDAQ:GOOG)’s search business – whereas one could make the case that the closed nature of app ecosystems (i.e. iOS app store) is an inhibitor. By bridging this moat and propelling greater engagement on the tablet/smartphone web, this should translate into more addressable dollars vs. that same engagement occurring through apps. And as analysts put the near, medium, and longer-term pieces together, they view the introduction of enhanced campaigns as a judicious maneuver to further strengthen the search business model.
Analysts from Credit Suisse are raising their target price to $982, and have decreased their CAPEX assumption, which had previously contemplated 20% CAGR over the next five years to reach an unlikely $12.5b by 2018, to a more moderate 14% CAGR trajectory – this still assumes that Google Inc (NASDAQ:GOOG)’s CAPEX should almost double over the next five years.