Alphabet Earnings: Mobile And YouTube Boosts Google Revenues As Other-Bets Still Bleed Cash

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Alphabet (NADDAQ:GOOG,GOOGL) announced third quarter results on October 27th. For the quarter, the company reported 20% year-on-year growth in revenues to $22.45 billion, in line with our expectation. On a constant-currency basis, revenues grew 23%. Google segment revenues for the quarter were $22.25 billion and were up 20% over the prior year. While Google’s operating profit grew by 16.7%, the operating margin declined by 87 basis point to 30.5%. In contrast, Alphabet’s moon-shot ‘other bet’ generated revenues of $197 million and operating losses of $865 million.

Even though pricing pressure on online ads continued, the ad volume for Google continues to fillip revenues. Furthermore, the movement in Google Sites paid clicks and CPCs primarily reflects the continued growth in YouTube, TrueView and mobile search. Furthermore, the company said that the momentum in its play store sales and its programmatic platform were instrumental in revenue growth in Q4. In this note, we will discuss Google’s results.

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Number of Clicks Grows Due To Programmatic Buying Even As Cost-Per-Click Continues To Decline Due To TrueView

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We currently estimate that PC search ads, mobile search ads and YouTube ads contribute approximately 57% to the firm’s value. Cost per click (CPC), a metric that measures the price paid for the number of times a visitor clicks on a search ad, has been on a steady decline for the past few years.This quarter, it declined by 13% on Google websites and 14% on network member sites. Furthermore, aggregate cost per click declined by 11% during the quarter. The recent trend is indicative of geographical mix, device mix, currency headwinds and property mix, though the company has stated that it will continue to monetize mobile devices effectively. Note that a key part of the decline has resulted from the rapid growth of YouTube, where a majority choose to use TrueView ads and contribution from buying on DoubleClick Bid Manager, which monetize at lower rates than ad clicks on Google.com.

Additionally, Google is looking to monetize its properties through its programmatic platform, which matches relevant ads with content, as well as through an increase in user-generated online content. However, this is negatively impacting Google’s CPC as the programmatic platform does away with inefficiencies of improper ad matching. As a result, the company’s top line growth from search ads across network member sites has failed to match the growth in search volume. Google is focusing on its programmatic businesses including AdMob, AdExchange, DoubleClick Bid Manager, and these continue to grow at a strong rate. This has resulted in an increase in ad volumes and 33% improvement in aggregate paid clicks for Google. Going forward, as Google improves its programmatic platform, we expect that the growth in online advertising paid clicks will continue but will weigh on CPC.

Play And Ads Revenues From Mobile To Grow

The mobile search ads division is the largest division for Google and makes up approximately 22.5% of its total value, according to our model. Google, with 90% market share, dominates the mobile search engine market. One of the key reasons for this dominance is its flagship Android OS, which has witnessed excellent adoption and penetration in the smartphone space. A user with an Android phone is more likely to use Google search compared to a user using another OS. In Q3, Google reported that shoppers searched aggressively for products on their mobile devices with the aid of AI tools such as Google Assistant.

As part of its strategy, it remains focused on building the mobile ecosystem that has the right ad formats and measurement to take advantage of all the platform ads. Google has launched artificial intelligence based Assistant app that helps users with advanced search. Its mobile services like Now on Tap, which essentially uses machine learning, lets user access additional useful information based on recent search and present location. We believe that, as Google’s mobile ads strategy continues to evolve, the aggregate paid clicks will increase and boost the number of ads sold in coming quarters.

YouTube Boosts Ad Volumes

In our pre-earnings note, we mentioned that we would be closely watching YouTube results because it caters to the rapidly growing online video ad market. During the earnings call, the company announced that its YouTube revenue was significantly higher, driven by video advertising across TrueView, with a growing contribution from buying on DoubleClick Bid Manager. The company reported that more than 1 billion monthly users are watching hundreds of millions of hours every single day. It also stated that YouTube has become the platform of choice for major brands, with a highly engaged audience.  Recent research suggests that many users turn to YouTube to help them in making a decision about buying something by watching videos about it. Going forward, YouTube is important for Google even though, according to our estimates, this division constitutes just under 3.3% of its value.

Performance Of Other Bets

Its Other bets business, which includes Fiber, Verily, Calico, Nest, self-driving cars, and incubation activities in X, reported revenue of $197 million and operating losses of $865 million on a quarterly basis. Other Bets capital expenditures were $324 million for the quarter, primarily reflecting investment in the  Fiber business. Considering that most of the companies under this category are in early stage of their cycle, Trefis expects that Alphabet will continue to bleed cash in the ensuing quarters.

We are in the process of updating our model. We currently have a $773 price estimate for Google, which is 5% below the current market price.

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