“Google” and the phrase “internet search” have become virtually synonymous. Google, Inc.’s (Nasdaq: GOOG) overwhelmingly dominant market share of web searches has helped the company to become the largest media company in the world, ranked by advertising revenue (as of 2013).

The company’s projected 2015 sales of $65.8 billion mean that it will account for nearly 40% of the global digital advertising spend this year.

With spending on digital advertising growing at 13% a year, well over the 3% growth in the broader marketing category, Google stands to continue posting great financial results. Its shares trade for 25 times trailing earnings, which is not out of line with other fast-growth technology companies:

If that was the entire story, then shares would be appealing. But a new patent filed by an up-and-coming competitor may mean trouble ahead.

The patent applicant has already dominated one area of our virtual lives and could soon be taking huge market share from Google’s biggest money-maker.

A Social Media Giant’s Strategic Advertising Plans

Facebook, Inc. (Nasdaq: FB) recently filed for a patent that may underpin a lethal combination in internet data and advertising. The patent covers the use of an exchange server to better match consumer data with publishers. Specifically, it says, “This invention generally relates to advertising and more particularly to layering social networking system data on user data to target content item to users.”

Facebook has all the data it needs through its social graph search and daily engagement with nearly 1.4 billion monthly active users. It may soon use this data to better match advertisements with users that are more likely to buy a product.  

While Google is the undisputed king in search, social data may prove to be a more powerful tool for ad-matching. The social networking website Google+ offers the company some social data, but it’s a much smaller community with just 359 million monthly active users.

Despite Google’s size and head start, Facebook is already a strong competitor for advertising dollars. Advertising revenue makes up more than 90% of total sales and grew 64% to $11.5 billion in 2014. Total sales for the social giant are expected to grow 37% this year to $17.2 billion and produce earnings of roughly $2 per share, an increase of 11% on last year’s earnings.

While sales growth has continuously increased at Google, costs per click have declined on a year-over-year basis in each of the past eight quarters. Cost per click is the dollar amount collected by a website from an advertiser when someone clicks on an ad.

Even as total dollars spent on digital advertising increases, falling costs per click mean that Google has struggled to book consistent increases in earnings.

(Source: Google’s Q4 2014 Earnings Presentation)​

Thus far, the biggest challenge for Google has been the shift toward mobile usage and mobile advertising. Cost per click is lower for mobile advertising than for desktop ads. Mobile ads are expected to account for 38% of total digital advertising spending this year.

Note that people spend more time on Facebook than any other website, and usage continues to grow quickly as the company expands its presence in emerging markets.

One example of the company’s powerful momentum in these markets: Millicom, an international telecom company with 56 million customers in Africa and Latin America, is offering free access to Facebook, even if the customer doesn’t have data available.

If Facebook’s new advertising tool reaches its full potential, then it could become an effective tool for matching consumers with products. That could lead to market share erosion for  Google.

I have run advertising campaigns for my two blogs on both Google and Facebook. For the same keywords, website clicks through Google search cost between $0.65 and $1.40 per click, while ads on Facebook have cost me between $0.27 and $0.60 per click. Google has been able to command higher prices on its search dominance, but may have to offer lower prices in the future to defend market share.  

Facebook: Relatively Expensive But With Upside Potential

Google’s sales growth rate has slowed considerably, to around 10% last year. That is well under the 20% annualized rate over the prior three years. By comparison, Facebook grew total sales by 58% last year, well above its compound rate of 49% over the prior three years. Lower acquisition costs and other expenses have helped Google maintain a 25% operating margin, but that still pales in comparison with Facebook’s 40% margin.

#-ad_banner-#While I admire Google’s drive to invent the future with incredible gadgets, I wonder if some of the $9.8 billion spent on R&D in 2014, a 24% increase on the prior year, could have been spent in areas that might deliver more immediate returns (rather than long-term gambles, such as driverless cars and elevators to space).

Facebook shares are relatively expensive at more than 40 times forward earnings. However, expected sales growth in excess of 30% over the next two years more than justifies that valuation.

Although consensus forecasts anticipate Facebook earnings of $1.96 a share this year, I anticipate roughly $2.15 in EPS. After all, Facebook has surpassed profit forecasts by an average 20% in each of the past four quarters.

An innovative new advertising tool could support investor sentiment on valuation and drive share prices toward my target of $92.45, from a recent $83.

Risks To Consider: Shares of Facebook are relatively expensive and could take a hit if general market sentiment turns lower. Investors may have to wait for growth to catch up to the price.

Action To Take –> Follow Facebook’s increasing competitiveness in online advertising against front-runner Google, and consider opening a position in accordance with your risk tolerance. Google will remain a strong player in search, but revenue growth could remain weak as new competition builds.

Oftentimes the little ideas are the big game changers — something like Facebook using its social network to topple Google’s ad dominance. My colleague Andy Obermueller devotes his time to identifying game-changing trends and the companies that should benefit from this. This has led readers to investments that went on to gain triple-digits.

More recently, Andy has been talking about the threat that cyber criminals pose on individuals, multinational corporations and even governments. This is a serious problem, in its infancy and one that will take decades to fight. But don’t let this scare you. Andy has identified four companies that specialize in protecting sensitive information from criminals. These are young firms, just like US Ecology, provide robust upside potential for early investors. If you haven’t heard about this opportunity yet, then I urge you to check out his comprehensive report on how to profit from the world’s greatest threat, by clicking here.