Why Apps Could Be More Important to Google Than Search


Google (GOOG) generates the vast majority of its revenue from search and advertising linked to its search engine, but Google Play, its competitor to Apple's (AAPL) App Store could be much bigger than previously thought.

Credit Suisse analyst Stephen Ju, who rates shares outperform with a $130 price target, believes that Google Play could generate $4.4 billion in revenue in 2014 for Google, and could be among the company's most important assets, given its tremendous growth, given its 18% sequential growth and a greater urgency for developers to focus on updating apps.

"We hence reiterate our belief that Play is one of the most important among Google's array of emerging multi-billion dollar opportunities as: 1) it has grown over the last two years from zero to a level equal to YouTube in size (if not greater), 2) it will grow more rapidly (it should exit 4Q14 growing ~55%, 2014/2013 YOY growth ~99.5%), and 3) dollar for dollar it should ultimately contribute higher operating profit and free cash flow given the lower cost to operate (lower TAC)," Ju wrote in the note.

Google (iStock Photo)Google (iStock Photo)
Ju notes that the 18% sequential growth seen in second quarter bookings means that spending on mobile game content "appears robust," and could help Google Play end the year growing at 55%, and that revenue would grow 97% in aggregate over 2013 revenue.

Though investor sentiment has soured on gaming companies like Zynga (ZNGA) and King Digital (KING), Ju notes, other gaming companies such as Supercell and Kabam may be the source of some of the upside seen in gaming revenue, even if it's not confirmed.

Google, like Apple, takes a 30% cut of revenue generated from apps, and the developers take the other 70%. Included in that 30% cut are expenses for credit card fees and what it shares with telecom partners, so the margins on Google Play are presumably very high, even if they are not disclosed.

Though Google Play has been growing incredibly fast, with Ju modeling triple digit revenue growth for the first and second quarters (153% and 133%) of this year, it remains to be seen whether that growth can continue.

"As we look to the future, the drivers for Google Play's continued growth will be different in the developed markets such as Japan versus emerging markets," Ju wrote in the note. "For Japan which we view as a special case, the recurring theme we have seen among not only the incumbent social networking platforms such as DeNA and GREE but also from the game developers is the recognition of the strategic imperative and the resulting scramble to port game content to native apps format from the mobile browser."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Stocks , Investing Ideas , Technology

Referenced Stocks: GOOG , AAPL , ZNGA , KING

Chris Ciaccia

Chris Ciaccia

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