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Alphabet: Fueled by GCP, but Doused by YouTube Letdown
Artificial intelligence continues to be its secret sauce
“AI continues to be at the heart of our core search and information products. We launched multi-search and Google Search this quarter. It is a new way people can find what they need using both images and words. For example, you can snap a photo of a shirt pattern and then type the word green to find a green shirt with that pattern”
Have you noticed how much smarter Google Search has become on your phone lately? You can even have a Google bot call up restaurants to make reservations these days. AI is the secret sauce to everything that Google does, from search and e-commerce, to GCP and YouTube.
Overall quarterly revenue growth rate was 23.0%. Q1 was against tough comps, as the preceding Q1 2021 period saw pent up ad dollars from much of FY 2020; Q2 2022 will face even tougher comps, since Q2 2021 revenue growth rate was 61.6%.
Cloud revenue remains a bright spot, though at this point it is only 8.6% of total revenue. It increased by 44% in Q1. GCP’s revenue growth rate was again above overall Cloud. Google has been aggressively pursuing enterprise clients with huge incentives – it appears to be working. In Q1 2022, it signed Dun & Bradstreet, Boeing and Sony’s Crunchyroll. Cybersecurity is a key focus for Google, given the recent acquisition of Mandiant.
RPO did not change sequentially, standing at $51bn as of end of Q1 2022. Q1 is the weakest quarter for enterprise sales, and without a mature customer base (yet) for its relatively new GCP business, renewals were likely minimal. Year on year growth rate was 64.5% though.
Other noteworthy points from Q1 2022 include:
YouTube grew by a low 14.4%, due to a combination of tough comps, advertising pullbacks (especially DR) in Europe due to war in Ukraine, and suspension of activities in Russia. Engagement and viewership, however, continued to be robust
Google Search growth slowed down to 24.3%, impacted mainly by tough comps from last year
Google Other grew only by 5% - this is mainly due to reduced take rates on Google Play
Operating margin @29.5%, which is consistent with Q1 2021, in spite of robust headcount growth and slowdown in DR ad dollars
Q4 added 7,400 net new employees – a strong sign of management confidence in its business, amidst macro concerns and political situation in Europe
Google’s board of directors authorized an additional $70 billion in share-buyback for this year; in Q1 2022, it had already repurchased $13.3 billion. Back in 2021 and 2020, it repurchased $50 billion and $31 billion, respectively
Tough comps make year on year numbers look weaker, but fundamentals remain well intact. Macro is a wild card. AI continues to be the underlying strength powering innovations across its entire product slate. As GCP scales, management is proving skeptics wrong with its effective enterprise GTM motion. Google Cloud will most likely exceed $30 billion run rate by end 2022, with a chance of profitability in FY 2023.
(Author owns Alphabet shares)
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