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Alphabet Betting Outside Search

Posted on Tuesday, Jan 31st 2017

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Alphabet (Nasdaq: GOOG) recently announced its fourth quarter results. While revenues surpassed market expectations, the earnings were a miss due to accounting policy changes. But the market has been forgiving to Alphabet given the huge strides it is making in non-search areas.

Alphabet’s Financials

Alphabet’s fourth quarter revenues grew 22% over the year to $26.06 billion, ahead of the Street’s forecast of $25.26 billion. EPS of $9.36 was, however, lower than the market’s forecast of $9.64 for the quarter. The earnings miss was due to a tax charge of $586 million that Alphabet incurred in relation to its stock-based compensation. The tax charge was due to a rule change in the US that now expects companies to account for the tax benefits of paying employees in stock instead of cash. During the quarter, Alphabet had to record the charge for the full year.

By segment, revenues from the Google segment grew 22% to $25.8 billion driven by a 20% growth in revenues from Google’s properties. Google properties revenues came in at $17.97 billion and revenues from its Members’ websites grew 7% to $4.43 billion. Other revenues grew 62% over the year to $3.4 billion. Google Other segment includes revenues from non-ad businesses such as the Play Store and infrastructure sales and hardware. Growth improved 39% over the quarter driven by the Pixel phone launch.

Revenues from Other Bets grew 74% to $262 million from from $150 million a year ago. Other Bets includes the famous Nest business along with other moonshot initiatives. Losses from the segment reduced marginally from $1.2 billion to $1.1 billion for the quarter. Alphabet did not break out the revenues for YouTube, but analysts estimate that the business would be generating nearly $14 billion-$15 billion a year.

Among operating metrics, aggregate paid clicks grew 36% over the year and 20% sequentially. Paid clicks on Google websites grew 43% over the year and paid clicks on members’ websites grew 23% over the year. Aggregate cost per click fell 15% over the year.

Alphabet ended the year with revenues growing 20% to $90.27 billion. EPS for the year came in at $27.85 compared with $22.84 a year ago.

Alphabet’s Diversification

Alphabet’s recent results show how the company is successfully diversifying into other businesses besides search advertising. During the quarterly call, its management reaffirmed plans of continuing to do so.

Currently, Alphabet is focusing on a few key areas including machine learning and its three big bets – YouTube, Cloud, and hardware.

Within machine learning, Alphabet continues to move from mobile-first to AI-first with an intelligent computing platform that users can interact with naturally. Last year, Alphabet had more than 350 launches that were powered by machine learning and spanned areas including search, maps, messaging, and Google Play. Machine learning helped Alphabet deliver features such as easier e-mail replies and categorization, better YouTube recommendations, improved cameras on Pixel phones, and smarter bidding for advertisers in AdWords.

Its biggest achievement in the segment has been the release of Google Assistant which allows users to interact with it through a natural conversation. Last month, Alphabet announced the launch of Actions on Google, an Assistant platform that enables developers to build conversation actions for Google Home. The Assistant has also been integrated with Google’s messaging app Allo. During the last quarter, Allo expanded in languages including Hindi, Brazilian, Portuguese, and Japanese.

Alphabet also made significant advances using neural machine translation. It is now working on releasing neural machine translation across more than 100 languages available in Google Translate in 2017 and for all of its Cloud customers through the Google Cloud Translation API.

Machine learning is also driving the use of Google Photos with features such as the creation of automated collages, movies, and albums. Last quarter, Google released PhotoScan that helps users digitize old printed photos.

Within Alphabet’s three big bets, YouTube continued to be the leading destination for online videos globally. Like other online media giants, Alphabet is also investing in original content. It now has a library of 27 originals and has tied up with popular YouTube creators along with big directors and producers in Hollywood. It recently released This Is Everything and Gigi Gorgeous at the Sundance festival to positive reviews. I think Alphabet could help YouTube through some acquisitions. As I said earlier, it may be helpful if it picked up Twitter. Twitter may not have been the stock market’s favorite poster child of late, but it is without doubt, a huge social impact platform. Google has always tried, and failed, to develop a social platform of importance. Adding Twitter and integrating it into its other activities will not only give Google a social presence, but also the ability to drive social media influence – both capabilities that it lags way behind Facebook.

In September, Twitter had engaged Goldman Sachs to help plan a sale but its anemic user growth rates, losses, and toxicity have been hampering its buyout prospects. From about $40 billion a few years ago, Twitter’s market cap has plunged to about $13.8 billion. I think Twitter’s market capitalization will continue to fall and Alphabet should easily be able to buy it given the coffers of cash it holds.

To drive the second big bet of the Cloud business, Alphabet acquired Apigee last quarter for $625 million. Apigee is an API management platform that has helped customers like Walgreens, AT&T, and Bechtel build digital products with open APIs. The acquisition will help Google become an established player in the API management space.

Finally, Alphabet’s other big bet is hardware. In October, it introduced a new family of devices that are made by Google – Google Home and Pixel. Google Home has been designed to deliver a seamless Google experience by integrating it across all Google devices within the home. Google is now working on developing an ecosystem of partners that can help build more integrated experiences for its users. Finally, the Pixel phone which has built-in Google Assistant has received strong reviews. Some reviewers are even calling it better than the iPhone 7 Plus when it comes to the cameras in the phones and the very helpful Assistant. Pixel phone was trending at revenues of $3.4 billion compared with the Street’s forecast of $2.9 billion.

Alphabet’s stock is currently trading at $802.32 with a market capitalization of $552.7 billion.  It touched a record high of $841.95 earlier last month. It had fallen to a low of $663.06 in February last year.

Photo Credit: Alli/Flickr.com

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