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IT software and Services industries are suffering from a fall in demand for software and web services as consumers are focusing solely on essentials and not discretionary products. That said, the industry has seen companies with a portfolio of software as well as services aimed at remote collaboration benefit due to the growing number of people globally. Many companies are also operating with employees working remotely from their own home. After Q1 results it is clear that the company's advertising revenues are expected to see slower growth than expected.
Alphabet announced its Q1 2020 results on April 29th, 2020. The company reported revenues of $41.2 billion, up 13% y-o-y and up 15% on a constant currency basis. Google Advertising segment as a whole saw a slower revenue growth at 10.3% y-o-y as it recorded revenue of $33.76 billion. Google Cloud saw a good revenue growth as it recorded revenue of $2.8 billion up, 52% y-o-y. Operating Margin increased to 19%, and Operating Income was recorded at $7.98 billion, up by 20.7% y-o-y. Earnings for the quarter were recorded at $9.87, up from $9.50 in 2019.
Below are key drivers of Alphabet's value that present opportunities for upside or downside to the current Trefis price estimate for Alphabet:
For additional details, select a driver above or select a division from the interactive Trefis split for Google at the top of the page.
Google.com and Google's international sites (e.g., Google.ru, Google.com.br, and others) offer a dedicated platform to conduct searches on the Internet through PCs and wireless devices.
Google makes money from contextual advertising known as keyword advertising that is shown based on the type of search a user conducts. For example, a user searching for "NYC restaurants" would be shown a variety of ads on the right-hand side of Google's search results about restaurants and food services in New York City.
Advertisers on Google bid for keywords (such as "NYC restaurants ") to display their advertisements on the Google search page. Google AdWords allows these advertisers to display advertisements in Google's search results and the Google Content Network through either a cost-per-click or cost-per-view scheme. The pricing of keywords, the inventory of keywords available, and the frequency of user search impact how much money Google makes on search.
In addition to advertising on its search engine, Alphabet makes money by placing advertisements on other Google-owned properties such as video-sharing site YouTube, email service Google Mail (Gmail), etc. Alphabet also makes money by facilitating the placement of advertising on its "partner" websites (via ad serving platform AdSense) from which it receives a share of the advertising revenue.
Google search on mobile is increasingly gaining importance as more and more users are shifting towards mobile devices like smartphones and tablets for desktop-based web browsing. According to our estimates, derived from publicly available sources, tablets and smartphones surpassed PCs in use globally in 2014. As a result, mobile search is increasingly gaining importance for Google, rivaling its PC-based search in contributing towards Google's stock.
We believe Google Search Ads is much more valuable than Ad Partnerships for Search & Content, YouTube, Gmail, and other divisions of Alphabet due to the following reasons:
Alphabet's flagship search business, Google, continues to dominate globally. Competitors such as Microsoft have been consistently pushed back as Google retains market shares of around 63% and 95% in PC and mobile devices, respectively. The company's superior algorithms and brand recognition have found favor with users, and to date, the search engine market has not boasted of a better search tool. Given the current trends, Google's dominance is expected to continue, although one cannot discount future technologies such as Apple's Siri as possible future threats.
As web penetration increases across emerging markets like India, users are expected to increasingly become more familiar and comfortable with using web search as the flagship tool to look for information. In addition to this, web browser development has made it easier to do a web search promptly. For example, Google Chrome obviates the need to open the Google homepage to perform a search. These above factors should contribute significantly to growing web searches for every PC device globally.
The mobile revolution would have a significant role to play in the way Google search is utilized. Smartphone and tablet capabilities are improving by leaps and bounds. This includes personal usage like finding restaurants and utilizing maps and GPS (Global Positioning System), as well as professional uses such as sending/receiving emails and making presentations. As bandwidths increase in emerging markets, mobile device functionality is expected to come at par with PCs in the coming years. This should lead to a substantial increase in the number of mobile devices in use globally.
We expect increasing adoption of Internet search capable mobile phones, higher mobile Internet speeds, and increasing partnerships between search engines and mobile phone manufacturers (e.g. think Google search on iPhone). According to a report by Zion Research, global mobile ad spending is expected to grow to $245 billion by 2022, a CAGR 15% over 2016 numbers. Google's open-source mobile OS, the Android, should greatly benefit from this, as it uses Google search as the default search option. Android also has the advantage of being used by multiple manufacturers, including Samsung, LG HTC, and most of the Chinese vendors.
In contrast to search, which is more functional and commercial in nature, online video and social networking are more entertainment-focused, where ads are generally seen as a distraction. Currently, advertisements displayed on such platforms are graphical and static, which does not drive the same recall as a moving video (e.g., television ads). As YouTube and other video sharing sites figure out better ways of displaying ads that are not intrusive and do not interfere much with the user experience, advertisers will be willing to pay more for such ads, driving up overall video advertising monetization.
With the advent of the smartphone, application development has taken center stage. Most smartphone users now use specific apps to search for products and services. For example, users tend to use Amazon's app to search for products they want to buy, and Yelp's app to search for services (Restaurant, Taxi's, etc.). As a result, Google's search engine is circumvented completely. This can lead to a loss in revenues and market share for the company. However, to get around this issue, Google introduced deep links that surface information stored in apps. This has helped the company to counter the effects of an in-app search, and the mobile revenues for the company have improved.
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