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Alphabet Losing Ground to Amazon

Posted on Wednesday, Oct 31st 2018

Last week was a bad week for the Alphabet (Nasdaq: GOOG) stock. Its disappointing results coupled with the market’s unease saw the stock fall to 6-month low levels after the results announcement. The investors are also worried about Amazon’s growing strength within the advertising segment.

Alphabet’s Financials

Alphabet’s third quarter revenues excluding Traffic Acquisition Costs grew 22% over the year to $27.16 billion, missing the Street’s forecast of $27.32 billion. Gross revenues grew 22% to $33.7 billion. Adjusted EPS grew 37% over the year to $13.06 and was significantly better than the market’s forecast of $10.54 for the quarter as Alphabet continued to rein in costs.

By segment, Google’s advertising revenue grew 20% over the year to $28.95 billion, driven by a 22% growth from Google properties and a 13% increase from network members’ sites. During the quarter, total traffic acquisition costs rose 20% to $6.58 billion. Google’s non-advertising revenue increased 29% over the year to $4.64 billion, led by Cloud and Play. Revenues from the Other Bets segment were up 25% over the year to $146 million.

Among operating metrics, paid clicks on Google properties jumped 62%, and cost per click fell 28% over the year. Within the non-Google properties, impressions on network members’ sites grew 1%, and cost per impression rose 11%.

Alphabet ended the quarter with a massive $106 billion in cash and equivalents on its balance sheet.

Alphabet’s Growth Drivers

Alphabet is counting on growth across multiple areas to drive its revenues. It is launching its own hardware, Made by Google, that integrates latest advances in software, hardware, and AI. The new hardware lineup for the upcoming holiday season includes the Pixel 3, Google Home Hub, and the Pixel Slate tablet. The Pixel 3 uses AI to create a best-in-class camera and comes with features like Top Shot so that users don’t miss a shot, Night Sight to help uses take good pictures even in bad light, and a custom security chip. Google Home Hub is its first smart speaker with a screen that shows the users information such as their morning commute and provides a handsfree control of the smartphone. Google is seeing significant traction among the users for its devices. It does not disclose the number of users the services have, but claims that the Daily active users of its Google Home devices have grown by five times in the last year alone.

Besides the hardware segment, Alphabet is investing in core products and platforms. Last month, it introduced a new AI-powered ranking approach that delivers more relevant results, a new Google Feed called Discover that helps users stay informed on topics that matter to a users, and an improved search experience for Google Images. Within Google Assistant, the service is now available in 20 languages and across 76 countries. It also introduced a new Duplex technology for Pixel users for completing real-world tasks, such as making reservations, and booking a ride service over the phone.

For YouTube, the company announced a $20 million investment to expand its YouTube learning initiative, that will help fund established and emerging educational careers. It is also partnering with organizations like Goodwill and Year Up to create curated playlists to teach career skills directly in its new learning channel. YouTube is also building alternative revenue options for its developers such as Super Chat, Channel Memberships, and the ability to sell merchandise directly to fans.

Alphabet is making the necessary moves, but the market is concerned about Amazon’s growing prowess. According to a recent eMarketer report, Amazon is seeing a growth in advertising revenues as more users are using its site for product searches instead of Google. The report claims that this year, Google and Facebook will together account for 57.7% of US digital ad revenues, compared with 59.1% share reported a year ago. Amazon is now expected to account for 4.2% of the market. Google’s market share has been slipping from 41% in 2016 to an estimated 37% this year.

I would like to know from you about your search preferences. Where do you prefer to search for products? Amazon or Google?

Alphabet’s stock is currently trading at $1,036.21 with a market capitalization of $724.7 billion.  It touched a record high of $1,273.89 in August this year. It has grown from the year low of $980.64 that it had fallen to in April this year.

Photo credit: Thomas Hawk/Flickr.com.

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