Google’s Worrisome Margin Attack – Alphabet Inc. (NASDAQ:GOOG)

Google’s (GOOG) (GOOGL) Traffic Acquisition Costs, or TACs, have been on the rise for the past few quarters. Are there any long-term implications with where Google is getting its traffic from? What is the effect of rising costs on Alphabet’s bottom line and how does it impact its future growth potential? More importantly, how does this translate to a potential opportunity to buy into Alphabet?

Google’s advertising revenue is growing at a speed that defies its size. There aren’t many companies that make more than $25 billion a quarter. And even among them, there are only a few that can keep hitting above 20% growth. But as Alphabet’s advertising business grows bigger, the problem of TAC increase seems to be increasing rather than reducing in magnitude and proportion. That’s further exacerbated by the fact that TAC accounts for the major portion of overall costs.

What that does is make many investors wonder how all of this will affect the company’s future growth potential.

In this article I will help identify the reason behind rising TACs, their impact on Alphabet’s future, and the huge potential opportunity for alert investors.

What is Traffic Acquisition Cost or TAC?

As defined by Alphabet:

“Cost of revenues consists of traffic acquisition costs (TAC) which are paid to Google Network Members primarily for ads displayed on their properties and amounts paid to our distribution partners who make available our search access points and services. Our distribution partners include browser providers, mobile carriers, original equipment manufacturers, and software developers.” – Alphabet Annual Report 2016

Google needs traffic to show people the advertisements that bring them revenue. Traffic flows into Google properties in two ways: organic traffic, which Google generates through its own applications, and paid traffic, where the company pays money to a third-party for sending traffic to Google properties. In short, TAC is the amount of money…

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