Google's PLAs to Boost Revenues

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Reportedly, Google Inc.’s (GOOG) successful new product-listing ads (PLAs) are expected to hurt retailers such as Amazon.com (AMZN) and Wal-Mart Stores (WMT). Introduced last year, Google’s paid product-listing ads have removed many unwanted, unsolicited ads and replaced them with products that top retail houses with huge funds would want to promote.

This is expected to hurt retailers’ profitability, as they will be forced to increase their spending on promotions. The new product particularly hurts Amazon, which has gained significant visibility through Google’s unpaid search results prior to the launch of the new system.

As the new paid ads appear above organic, non-sponsored search results, they negatively impact visibility of an unpaid ad. In order to boost their visibility companies such as Amazon, Wal-Mart and eBay (EBAY) recently started buying these paid ads. We believe that this incremental spending by the leading retailers will boost Google’s top-line in the near term.

Google is a market leader in online advertising and has been trying to explore various ways to diversify its revenues and fight competition. Acquisitions have been a key catalyst over the years, as Google continues to acquire smaller companies with specialized technology to boost product offerings.

In Feb 2013, it acquired Channel Intelligence for $125 million to boost its e-commerce business. Earlier this year, it acquired an infrastructure startup company, Talaria Technologies, to boost its cloud offerings. Google also acquired a mobile mapping and navigation company – Waze Inc. – for about $1.1 billion.

Google reported gross revenue of $14.89 billion in the third quarter of 2013, up 5.6% on a year-over-year basis. The company has expressed its intention to increase investment in its core products in the future, which we believe will boost its market share in the long run.

Currently, Google has a Zacks Rank #2 (Buy).

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