Alphabet Inc (Nasdaq: GOOG, GOOGL) investors have kept a close eye on the global regulatory climate and its potential impact on Google’s advertising business. But analysts now say more regulation on data collection and usage will actually serve to help Google defend its dominant market share against smaller competitors.
According to Nomura Instinet analyst Mark Kelley, there are parallels between what is happening in the online advertising business and what happened to the U.S. banking industry following the 2008 financial crisis.
“With large audiences already in place, the large platforms are best positioned, in our view, and we expect the newly regulated industry to embolden these incumbents, consistent with recent history,” Kelley says.
Kelley says large, well-established companies like Google and Facebook (FB) are better equipped to handle the financial burden of regulation than their smaller competitors.
Despite impressive growth numbers, Alphabet stock has lagged internet peers such as Netflix (NFLX) and Twitter (TWTR) in the past year. Kelley says that underperformance is proof that investors are concerned about the impact regulation could have on advertising growth. The General Data Protection Regulation was implemented in Europe in late May, so the next couple of quarters for Google could be a strong indication of what investors can expect from the GDPR and any subsequent regulations in other global markets.
“Should GDPR-like regulation begin to seep into other parts of the world, we believe GOOGL is the best-positioned to handle any changes,” Kelley says.
In the meantime, Kelley says Alphabet has established a valuable brand and a dominant market share of online search and video advertising.
Traffic acquisition costs are higher for mobile than for desktop, which could eat into Google’s advertising margins. But Kelley says Google has an even more dominant and less vulnerable share of the mobile market than the desktop market.
He says YouTube is the gold standard of digital video advertising, the fastest growing segment of the advertising business. Online advertising is expected to grow at least 4 percent annually through 2020. Nomura projects..
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