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Alphabet Bets on Artificial Intelligence

Posted on Tuesday, Feb 9th 2016

Alphabet (Nasdaq: GOOG), previously known as Google, reported stellar results last week. The market was pleased with the performance and helped drive Google to a valuation higher than Apple. Not for long though. More recent management changes have hurt the company and the stock price has fallen some. Apple has the crown back for now.

Alphabet’s Financials

Alphabet’s fourth quarter revenues grew 18% over the year to $21.329 billion, ahead of the Street’s forecast of $20.6 billion. EPS of $8.67 was also ahead of the market’s projections of $8.10 per share.

Alphabet had promised more visibility into Google’s operating and financial metrics. In keeping with that, they did break out revenues for Google’s search and other business. By segment, revenues from Google’s core business brought in $21.178 billion in revenues. Its non-core business, termed as Other Bets, saw revenues grow 42% over the year to $151 million. Other Bets includes all the other investments that Google has made so far including Google Fiber, Nest, Google Ventures and Google Capital X.

Within the Google segment, advertising revenues grew 17% over the year to $19.078 billion and Other revenues came in at $2.1 billion. The growth in advertising revenue was driven by a 22% increase in paid clicks that was able to offset the 5% decline in cost per clicks. Within advertising, revenues from Google’s websites grew 20% to $14.94 billion and revenues from Google’s Network Members’ websites grew 7% over the year to $4.14 billion.

Gmail became the seventh entrant into the 1 billion plus user club. Google’s Search, Android, Maps, Chrome, YouTube, and Play already had already amassed over a billion users.

For the year, Google segment revenues grew 14% to $74.541 billion and revenues from Other Bets grew 37% to $448 million. Operating income for Google Segment grew 23% to $23.425 billion. Other Bets continued to deliver losses and the segment’s losses grew from $1.942 billion a year ago to $3.567 billion for the year.

Alphabet does not provide an outlook for the quarter. But the market is projecting current quarter revenues to grow 15% to $19.9 billion and EPS to increase 20% to $7.82.

Google AI Future

Last week, Google announced that its Search Chief Amit Singhal would be retiring. The position will be filled by Google’s Artificial Intelligence (AI) team lead John Giannandrea. Amit has been with Google for 15 years and has been pivotal in leading Google to its current status. John has big shoes to fill, but the management’s choice does suggest that Google has a lot more planned for Search in the future. Over the past few years, Google has been working on making Search more than just a gopher for users. Google is instead working on ensuring that Search becomes similar to an assistant to its users, and making John lead this team may be the move that Search needed. As Google’s CEO, Sundar Pichai commented,

“We have focused a lot on really improving Search and Mobile and now we are investing in evolving this to actively assist our users throughout the day in smart and helpful ways. This comes thanks to our years of investments in areas like natural language processing, computer vision, Knowledge Graph and other areas. And the next wave will be powered by big advances in machine learning and artificial intelligence, an area where we believe we lead the industry.”

Of late, Google’s AI team has been recording significant milestones. Last month, the AI division’s London-based office announced that it had developed a program that was able to defeat a human expert on Go – a Chinese game known for a complexity higher than Chess. Google is now preparing for the world championships for the game in March.

Google is continuing to improve its AI offerings as well. In November, they open-sourced TensorFlow, the new machine learning system to help accelerate discovery and development in the field. It has already deployed machine learning in the form of Smart Reply in the Inbox by Gmail. The new feature suggests short responses relevant to an incoming email and within a few months of its launch has contributed to nearly 10% of all mobile responses in Inbox.

Google YouTube and Mobile

Meanwhile, Google continues to deliver impressive results in YouTube and Mobile. Mobile Search was strong during the last quarter driven by the holiday shopping season. Google believes that 30% of all online shopping purchases happen on mobile devices. Using their local inventory ads, users are able to see if a product they are looking for is in stock at a retailer nearby. Retailers like Lowe’s and Target are also using mobile to measure the foot traffic that search ads drove. They are also seeing more success in driving app downloads through offerings like Universal App Campaigns that help marketers run campaigns across Google Play, YouTube, Search, and Google’s Display Network.

Within video, YouTube has over 1 billion daily active users. YouTube on mobile also reaches more 18-49 year olds in the US than any other cable network. Google recently launched Shoppable TrueView Ads that help marketers find the relationship between inspiration and purchase and thus see better ROIs on ad spend. During the quarter, YouTube revenues grew at a significant rate. Alphabet did not divulge more details, but it did mention that Network revenues grew 7% over the year to $4.1 billion driven by growth of Programmatic ad revenues.

Google’s stock is currently trading at $682.74 with a market capitalization of $469.28 billion. It touched a record high of $789.87 soon after result announcement, making it even bigger than Apple. The recent announcement of the stepping down of the Search Chief has led to a decline in the stock value.

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