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Some investors have criticized Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) for being the least diversified among the technological titans. Microsoft it has its empire of software, cloud and hardware; Apple it practically prints devices to earn money and has an expanding service segment that travels by sidecar; and Amazon.com It has cornered e-commerce, in addition to cloud leadership and a myriad of other services. But Alphabet has ads, most of which are derived from Google. Sure, it has Google Cloud and YouTube, but they were supposed to be insignificant factors.
It turns out that is far from the case. The company began breaking down its results to show Cloud and YouTube during its 2019 final report, and continued to shed light on its fastest-growing businesses to start 2020. The ad business took a surprising hit due to coronavirus blockages, but things they weren’t as bad as they could have been.
Image source: Getty Images.
Google Cloud and YouTube to the rescue
Alphabet CEO Sundar Pichai kicked off the quarterly update on Tuesday with some comments on the crisis, noting that this is the first time a pandemic (and the resulting recession) has occurred in a digital world first. Although many companies are suffering a severe beating due to shelter-in-place orders and work from home, other areas of the economy are showing resistance even when social behaviors are affected, perhaps permanently.
Advertising revenue grew year-over-year through February before dropping to a mid-teen percentage rate after the blockade was established in mid-March. However, Google Cloud saw another massive increase in sales as companies rushed to put in place continuity plans to keep operations running and accelerate the growth of web and internal network traffic. Pichai recited a long list of organizations Google Cloud is helping, from New York State to the power of e-commerce Shopify to AT&T. Cloud is helping many companies transform their processes, but many others have been using Google’s G Suite cloud-based tools for a long time. The subscription service now has more than 6 million paying customers.
YouTube did pretty well, too, and while ads on the platform changed course at the end of the quarter, annual growth simply slowed to a high single-digit percentage rate in March. And the “other” segment made big profits, fueled by new YouTube subscribers (such as TV and Music) and increased use of the Play app store. The “other bets” investment portfolio was a drain on the bottom line, but progress was made on that front as well. Waymo’s autonomous vehicle business raised $ 2.25 billion in its first external investment increase, and Wing’s autonomous delivery saw traffic increase fivefold thanks to test programs in Virginia and Australia.
All in all, the Alphabet family did quite well considering the dark clouds looming over him.
|
Segment |
Revenue for the first quarter of 2020 |
Income for the first quarter of 2019 |
% Change |
|---|---|---|---|
|
Google Search and Member Property Ads |
$ 29.7 billion |
$ 27.6 billion |
8% |
|
YouTube Ads |
$ 4.04 billion |
$ 3.03 billion |
33% |
|
Google Cloud |
$ 2.78 billion |
$ 1.83 billion |
52% |
|
Others (YouTube, Google Play subscriptions, etc.) |
$ 4.44 billion |
$ 3.62 billion |
2. 3% |
|
“Other bets” and coverage |
$ 184 million |
$ 307 million |
(40%) |
|
Total income |
$ 41.2 billion |
$ 36.3 billion |
13% |
|
Free cash flow |
$ 5.45 billion |
$ 7.36 billion |
(26%) |
Data source: alphabet.
Google ads are down, but they’re certainly not out
But what about the main controller, Google search, and resulting ads? Expect a rough second quarter report card, as most of the COVID-19 outage will show during that period. Pichai and CFO Ruth Porat weren’t ready to expound on specific numbers that Google is seeing in April, but it may not be as ugly as some investors feared. Pichai stated:
The good thing about Search Ads and the direct response on YouTube too, but Search mainly, is that it is an extraordinarily effective system. It is a transparent system. [Advertisers] have a very clear sense of [return on investment]. It is highly measurable, highly profitable. And that’s why we’ve always seen, and also saw this in 2008, that people respond in the short term, but recovery is also quick when you return.
The flexibility to quickly turn Google search ads on and off, and the cost-effectiveness of running those ad campaigns, means that results are likely to rebound quickly once things start to normalize. Furthermore, digital advertising is still a long way from becoming the dominant and preferred method of advertising worldwide. The coronavirus is certainly going to be a hurdle, perhaps a big one, but Google’s search and advertising business is still in growth mode.
But the real sweetener is that Google is fast becoming a high-growth, diversified company, with multiple levers to drive its highest results. The tech giant is still a staple of the portfolio in my book.
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