Alphabet Earnings: Mobile Search And YouTube Continues To Boost Revenues

Alphabet (NADDAQ:GOOG,GOOGL) announced fourth quarter results on January 27th. ^[1] For the quarter, the company reported 22% year-on-year growth in revenues to $26.04 billion, in line with our expectation. On a constant-currency basis, revenues grew 24%. In line with our assessment in the pre-earnings note, much of the growth was driven by mobile search and YouTube.

Google segment revenues for the quarter were $25.80 billion and were up 22% over the prior year. While Google’s operating profit grew by 16.9%, the operating margin declined by 130 basis point to 30.6%. In contrast, Alphabet’s moon-shot ‘other bets’ generated revenues of $262 million and operating losses of $1.08 billion.

The core search business continued to witness pricing pressure, while ad volume for the company continued to grow. 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 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 

We currently estimate that PC search ads, mobile search ads and YouTube ads contribute over 60% 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 in a steady decline for the past few years. This quarter, it declined by 16% on Google websites and 11% on network member sites. Furthermore, aggregate cost per click declined by 15% during the quarter. The recent trend is indicative of geographical mix, device mix, currency headwinds and property mix.

Additionally, Google is looking to monetize its properties through its programmatic platform, which matches relevant ads with 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 and owned 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 36% improvement in aggregate paid clicks for Google. Furthermore, video ads also witnessed a decline in RPM due to the rapid growth of YouTube, where a majority choose to use TrueView ads and the contribution from buying on DoubleClick Bid Manager, which monetizes at lower rates than ad clicks on Google.com. Going forward, as Google improves its programmatic platform, we expect that the growth in online advertising paid clicks will continue but still weigh on CPC.

Play Store And Hardware Revenues Grew

The Google Phone division makes up approximately 6.8% of its estimated 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.  The company reported that Google play witnessed double-digit growth across the world and growth was over 70% in countries like India, Turkey and Mexico.

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 strategy for content and ads continues to evolve, the ads and content revenues will increase in coming years. This will also lead to growth in sales of Google phone and Home hardware.

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 $262 million and operating losses of $1.08 billion on a quarterly basis. Other Bets capital expenditures were $504 million for the quarter, primarily reflecting investment in the Fiber business.  Nevertheless, the company did report key business wins across Verily, Calico, Nest and Waymo.

We are in the process of updating our model. We currently have a $821 price estimate for Google, which is in line with the current market price.

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