Alphabet’s Strong Earnings Propel Stock To New High
Alphabet (NADDAQ:GOOG) announced its first quarter results on April 27th. [1] For the quarter, the company reported 22% year-on-year growth in revenues to $24.75 billion, about in line with our expectations. 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, the programmatic platform, and YouTube. Additionally, the company reported substantial growth in other revenues from Play, hardware, and Cloud. As a result of these strong results, the company’s stock soared to a new high in Thursday’s trading.
Google segment revenues for the quarter were $24.5 billion and were up 22% over the prior year. While Google’s operating profit grew by 21.6%, the operating margin was flat at 31. In contrast, Alphabet’s moon-shot ‘other bets’ generated revenues of $244 million and operating losses of $855 million.
The core search business continued to witness pricing pressure, while ad volume for the company continued to grow due to widespread adoption of its programmatic platform. Furthermore, the movement in Google Sites paid clicks and CPCs primarily reflects the continued growth in YouTube, TrueView and mobile search.
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Number Of Clicks Grows Due To Programmatic Buying
We currently estimate that PC search ads, mobile search ads and YouTube ads contribute over 60% to the company’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. In Q1, it declined by 21% on Google websites and 17% on network member sites. Furthermore, aggregate cost per click declined by 19% during the quarter. The recent trend is indicative of geographical mix, device mix, currency headwinds, property mix and the advent of the programmatic platform.
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 a result, the company’s top line growth from search ads pricing 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 44% 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.
YouTube And Maps Monetization In Focus
While the company has been monetizing its video on demand over-the-top (OTT) property YouTube through ads, its Map, a widely downloaded and used property, has not generated significant revenues. The company is looking to monetize both of these properties further. The company is trying to monetize its Maps property through local ads by surfacing relevant information to a user while he/she is navigating to his/her desired destination, while it launched YouTube TV in Q1 to further improve the monetization of its popular video platform that has over a billion users.
Play Store And Hardware Revenues Grew
Other revenues consist of the Play store, hardware, apps and other bets revenues and make up approximately 6.4% of Alphabet’s estimated total value, according to our model. Most of the value for this division can be attributed to the Play store and Hardware sales as its other bets are losing money.
According to our estimates. Google, with 95% 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 in developing countries.
Performance Of Other Bets
The company’s Other Bets business, which includes Fiber, Verily, Calico, Nest, self-driving cars, and incubation activities in X, reported revenue of $244 million and operating losses of $855 million on a quarterly basis. Other Bets accrued lower CapEx at $170 million as the company reduced its investment in Fiber due to the pause in expansion announced in 3Q 2016. 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 $845 price estimate for Google, which is slightly below the current market price.
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