Google is considered the king of online advertising, with 40% global market share.
We've all seen some radical changes in our life recently. It's undeniably frustrating to adjust to this new way of life, for some technology stocks, however, this has created some advantages. In light of this I've been re-looking at some of my top holdings, analyzing recent performance and future prospects. Today I'm looking at Alphabet (Google) $GOOG
The stock price has been ticking up recently after they reported their latest quarter revenue coming in higher than expected. Expectations were muted with the biggest concern from analysts of course being how much large companies would cut back on ad and marketing spend. Sundar Pichai, the CEO talked about a tale of two quarters, the performance was strong during the first two months of the quarter, but then in March, it pulled back. Let's dig in...
◾ Q1 Strong performance
The company reported 1Q20 total revenues of $41.2bn, up 13.3% yoy, primarily driven by better than expected performance in advertising revenues and continued momentum in Google Cloud. The company’s revenue grew by 18.7% in the APAC region (17.6% of total revenue), followed by 14.1% in the US region (45.8% of total revenue). EMEA region was weak compared to the other region, though still managed to grow 10.1%
The “Google revenues” segment contributed $41bn vs. $36bn, up 13.7%. Under this GOOGL generates revenues primarily from advertising (search, YouTube, network members) and services fees received for Google Cloud offerings and non-advertising revenue in Google cloud.
Ad-revenues were up double-digit (10.4%) at $34bn vs. $31bn in 1Q19, driven by strong performance in January and February, though partially offset by weakness in March due to the impact of Covid-19.
For the company’s search business (59.8% of revenues), revenues increased 8.7% to $24.5bn, driven by growth in user adoption and usage and increased advertiser activity. In March, although there was an increase in user’s search activity, revenues declined due to shift towards less commercial topics and reduced ad-spend.
◾ YouTube remains bright
For YouTube, revenue growth was high-single digits at the end of March as Direct Response (DR) ads continued to grow meaningfully while brand advertising faced pullbacks. YouTube remains the under-penetrated app, given its huge scale of monthly 2bn logged-in users and a billion hours of everyday video running time. With this breadth of users and depth of engagement, anything the company does to better unlock monetization stands to have large revenue potential.
◾ Cloud is where it’s at
Google Cloud business (6.8% of revenues) were $2.8bn in 1Q20 up 52.2% driven by continued growth in Google Cloud Platform and G-Suite offerings - a hundred million students and educators are now using Google Classrooms, that's doubled just from what they saw at the beginning of March.
One area which is performing below expectation is “Traffic Acquisition Costs” (TAC). TAC is primarily paid to Google Network Members for displaying ads on their properties and to distribution partners for providing search points on their platforms. However, the TAC rate as a percentage of advertising revenue declined from 24.1% to 22.1%. Cost-per-click (CPC), i.e. the amount the company charges advertisers declined 4% YoY due to continued growth in YouTube engagement ads where cost-per-click remains lower than other advertising platforms, as well as a shift in mix towards less commercial topics and reduced advertiser spending in response to COVID-19 in March.
Though I expect to see the impact of COVID-19 on the core business of ad-revenue, as corporates reduce their marketing budgets and small business owners shut down, I believe the company is well-positioned to absorb these short-term hiccups. Also post the pandemic cycle, expect digital marketing to gain share against traditional methods.
As per Management commentary, for the remaining part of the year the company expects to control expenses by reducing variable costs like marketing spending and cutting back hiring in FY20. At the same time, technology investments in servers and infrastructure should be flat. I believe these initiatives are prudent and necessary given the expected revenue decline and uncertainty in the speed of recovery.
◾ Outlook remains favorable
Google remains a superbly well-run company and continues to be in the space of technology stocks that are well-positioned for further growth during and long after the pandemic as they cater to those digital must-haves.