$10 Billion: Google’s Lost Advertising Revenues Due To The COVID-19 Outbreak

by Trefis Team
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Trefis estimates that Alphabet (NASDAQ:GOOG) will lose no less than $10 billion in advertising revenues this year due to the coronavirus pandemic. The company’s advertising segment includes three segments: Google Search and other, YouTube Ads and Google Network Members’ Properties. Combined revenues for these three segments have risen from $95.6 billion in 2017 to $134.8 billion in 2019 – up by 41% in 2 years. The Advertising revenue had seen high growth over the years as the company kept expanding its advertising solutions to cater to user needs and focus. The goal of the segment is to deliver relevant ads at the right time and to give people useful commercial information, regardless of the device they’re using. In Q1 2020, Google’s advertising segment’s revenue was $33.76 billion – up by 10.4% y-o-y. But the results will take a sizable hit in Q2 as the pandemic spread to key markets in the U.S. and Europe (which form more than 65% of Google’s top line) in late February/early March. As a result of the outbreak and the ensuing slowdown, we not estimate Google’s advertising revenues to grow by less than 7% in 2020 to $144 billion – down from our previous estimate of almost $155 billion based on an expected growth rate of 15%. This marks a good $10-billion reduction in the company’s top line.

Even though the revenue growth is expected to fall considerably, we believe the advertising segment and particularly Google Search segment will remain the cornerstone of the company’s business model as we detail in our interactive dashboard, Google Revenues:  How Does Google Make Money? 

 

Overview of Google’s Revenues

Google reported $161.7 billion in total revenues for full-year 2019. This includes five operating segments:

  • Google Search and Other: $98.1 billion in 2019 (60.6% of total revenues). Derives revenues from advertising on platforms like Google.com, the Google Search app, Google Play, Gmail, and Google Maps.
  • YouTube Ads: $15.1 billion in 2019 (9.4% of total revenues). Derives revenues from advertising on YouTube.
  • Google Network Members’ Properties: $21.5 million in 2019 (13.3% of total revenues). Derives revenues from advertising generated through Google Network Members’ properties.
  • Google Cloud: $8.9 million in 2019 (5.5% of total revenues). Derives revenues primarily from Google Cloud Platform, G Suite productivity tools, and other enterprise cloud services.
  • Other Revenues & Bets: $18.1 million in 2019 (11.2% of total revenues). Derives revenues primarily from hardware, GooglePlay, YouTube non-advertising, and other products and services.

Our interactive dashboard highlights all the components of Google’s Revenues and compares changes in the company’s top line with peer Microsoft.

 

Google Search and Other segment will continue to contribute the most to the top line

  • Revenue from Google Search and other division has increased by about 40.5% in the last two years, from $69.8 billion in 2017 to $98.1 billion in 2019.
  • Over the next two years, the division revenue is projected to grow by 15.5% to $113.3 billion by 2021.
  • This is higher than the projected growth of 12% in Google’s total revenue over the next two years.
  • Higher revenues are likely to be driven by continuous evolution, investments in new business strategies, higher reach, and geographical mix. The growth is expected majorly in 2021 as currently, the coronavirus situation has created pressure on organizations to focus on core business expenses only.

YouTube Ads to continue growth 

  • Revenue from YouTube Ads division has increased by about 85.9% in the last two years, from $8.2 billion in 2017 to $15.1 billion in 2019.
  • Over the next two years, the division revenue is projected to grow by 32.3% to $20 billion by 2021.
  • Higher revenues have been driven by the company’s ‘direct response’ and ‘brand advertising’ products, both of which benefited from improvements to ad formats and delivery and increased advertiser spending.

 

Conclusion

  • The spread of coronavirus and the resultant lockdown is mixed news for companies like Google. The advertising revenue growth is expected to falter, but the Cloud segment growth is expected to take off further as more organizations are getting their employees to work remotely.
  • In fact, the next few quarters will see subdued revenue growth for Google partly offset by its Cloud business.

Also, based on historical trends in revenues and earnings for the company vs. its peer Microsoft, we believe that Google stock presents a better upside potential than Microsoft in the long run.

 

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