Alphabet’s advertising business seems to be following the same pattern these days — but its operations beyond that look like they are beginning to grow into strong businesses in their own right.
The company reported its first-quarter earnings today that outperformed what Wall Street expected, with its advertising business once again continuing to generate an enormous amount of money at great margins. Alphabet said it had earnings of $7.73 per share on revenue of $24.8 billion, compared to Wall Street’s expectations of earnings of $7.40 per share on revenue of $24.2 billion. But let’s get to the more interesting part of the report: the rest of what Alphabet is working on.
In the first quarter, Google’s “other revenues” hit $3.1 billion in revenue, up from around $2.1 billion in the same quarter a year earlier. That division includes cloud, Play and hardware — so it can be hard to disassemble the components — but it still shows a growing new segment for Google beyond its normal search business. Google has increased its focus on a portfolio of cloud and enterprise products, which compete more or less directly with Amazon’s ballooning AWS business and Microsoft’s Azure division. Google’s bucket of “other revenues” last quarter grew more than 60 percent year-over-year and hit $3.4 billion in quarterly revenue.
To put things in some perspective, Amazon also reported its first-quarter results today, and said its web services generated $3.7 billion and operating income of $890 million. AWS generated $2.6 billion on operating income of $604 million in the first quarter last year. So these businesses can be extremely efficient on their own, and are only going to become more and more important as startups and larger companies look to offload all their biggest computational problems onto more on-demand hardware. The rise of GPU usage for machine learning — which will need to make its way into these web services — will also likely provide a major windfall for both Amazon and Alphabet’s cloud businesses.
All of this more or less represents a race to build a major cloud computing business that can operate at the kinds of margins that Google is accustomed to seeing in its advertising business. While Google is printing money with its ads business, it shows that it’s looking beyond standard search — whether that’s with a voice interface, phones, or a cloud business — in a kind of hedge against the future of the company. Traditionally known for “moonshots” like self-driving cars and internet-providing balloons, Google’s new and still somewhat boring businesses may shore up any kinds of major swings in user behavior around search that it can monetize with ads.
Losses for Alphabet’s “other bets,” which makes up basically the rest of the interesting businesses aside from its cloud and hardware, widened yet again. The company recorded an $855 million loss in the first quarter, up from $774 million in the same quarter a year earlier. Revenue, however, continued to climb, up to $244 million this quarter compared to $165 million in the same quarter a year earlier. These represent the kind of more weird and radical things that it’s working on, which, while it’s tried to pare back and make more efficient, still are basically a blip on its overall business.
The Google core business is, as usual, quite boringly efficient. We tend to see the same story every quarter — the value of each ad (cost-per-click) goes down while the number of ad impressions goes up, and Google makes a ton of money in the process. As a result, a lot of the attention has started to shift to its best beyond search, labeled literally in the “other bets” section of the company’s financial statements. Last quarter we saw that “other bets” once again contributed marginally to Alphabet proper, but its losses began to narrow. It seems like Alphabet still needs to get its affairs in order here.
Google’s cost-per-click fell sharply year-over-year in the first quarter, shrinking 19 percent. Its paid clicks meanwhile grew 44 percent year-over-year in the first quarter. Shares of Alphabet were up 3 percent in extended trading after it reported its earnings. (Shares of Amazon, too, were up.)
Alphabet has benefited from a wave in the entire tech industry that has buoyed stocks and added hundreds of billions of values to the so-called FANG (Facebook, Amazon, Netflix, Google) cadre of tech companies. Each has seen double-digit percentage point growth in their share prices — and Apple too, of course — in a rising tide across much of the top echelon of the industry. Google shares are up more than 10 percent on the year. It’s a barometer of success, to be sure, but keeping that stock price up gives Alphabet room to maneuver and place “other bets” while continuing to attract and retain talent.