Is Google on the Right Path?

Leading high-tech companies such as Google  are able to expand their operations by innovation and acquisition. With each method, risk accompanies reward. Google's recent decisions and innovations could open the company to new areas, extend its reach, and appreciate its market value. Let's explore the ways in which the company is trying to grow.

Advertising on Glass
The highly anticipated Google Glass is expected to be sold to the general public by 2014. Until then, it will remain unclear if this device is accepted the way the first iPhone was or goes down in history as the camera phone of its time. One concern is the device's price. The current price estimate is $1,500. For a new gadget, this price tag seems steep and could impede its growth in sales. In comparison, the first iPhone was sold for $599. Selling the new innovation for nearly three times the price of the first iPhone could be a hard sell.  

At least Google is looking into ways to monetize this device. Google recently received an approval for a patent for an eye-tracking sensor that includes charging advertisers if a Glass user looks at an ad while wearing the device. This so called "pay per gaze" could open a new advertising market for Google and thus enable the company to improve its advertising revenue. This also means that the company isn't just concentrating on innovation, but it's also finding ways to cash in on its inventions. 

Improving existing services
Google purchased  Waze, an Israeli-based company that makes map applications, for nearly $1.1 billion. This purchase may have been more than just a way to improve Google's map app. It may have also been a preventive tactic to keep companies such as Facebook from purchasing this company and directly competing with Google in the map-app market. Waze's main added value to Google is the drivers' interaction module that allows drivers to know from other drivers of any road blocks ahead, accurate duration of travel, accidents, and police monitoring. This will add great value for Google's users. This will also maintain, for now, the dominance of Google in the GPS map applications market.  

The high price Google paid for a small app company, which had around 34 million users at the end of 2012, isn't unheard of. Further, Google isn't the only high-tech company that acquires companies to improve and expand its services and product line. Back in 2012, Facebook acquired Instagram for nearly $715 million. The high price it paid consisted mostly of goodwill. Facebook estimated the value of Instagram at $521 million with goodwill of $433 million -- nearly 83% of Instagram's value was goodwill.  

Does Google+ start to pay off?
In the past, Google+ was mostly ridiculed for underperforming Facebook as a social media. The main criticism was the lack of "community feeling" in Google+. After all, Google+ users spend only three minutes per month on the site while Facebook users spend nearly 400 minutes. But Google found ways to turn this lemon into lemonade. According to one report, Google+ is used as a complementary device to Google's search engine. Google was able to improve its ad targeting by tracking via Google+ the online behavior of users.  

In the past quarter, Google was able to partly improve its ad performance. On the one hand, Google's average cost per click fell by 8% in the third quarter of 2013 (year over year). On the other, paid clicks sharply increased by 26%. The rise in paid-clicks was partly responsible for the moderate rise in Google's profit margin from 20.6% in the third quarter of 2012 to 23.1% in the third quarter of 2013. The company still has a long way to go before it will substantially improve its advertising business. Conversely, in the second quarter, Facebook was able to sharply augment its profitability and revenues by improving ad performance and increasing mobile ads. Facebook improved its click-through rate on both mobile and desktop in the past quarter. The improved rate expanded Facebook's ad revenue despite the low cost-per-click rate in mobile.  

Bottom line
Google is still finding ways to extend its reach to new areas and improving existing services, which could augment its revenues in the future. Not all these investments and innovations will improve the company's market value and they should be taken with a grain of salt. These steps have yet to reflect any substantial change in the company's growth in revenue or profitability.  

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Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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