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Google Should Emphasize PaaS and AI Strategy to Mitigate Advertising Slowdown

Posted on Thursday, May 2nd 2019

Earlier this week, Google’s parent, Alphabet (Nasdaq: GOOG) reported its first quarter results that, surprisingly, missed market estimates and sent the stock tumbling. A slowdown in the revenues caused the stock to fall 9% post announcement, making it the worst day for the stock since 2008.

Alphabet’s Financials

Alphabet’s first quarter revenues grew 17% over the year to $36.34 billion, short of the market’s forecast of $37.33 billion. This was the slowest growth that Google has reported in the last four years. Excluding traffic acquisition costs (TAC), revenues came in at $29.48 billion, again short of expectations of $30 billion. TAC grew to $6.86 billion, but as a percentage of revenue fell 200 basis points to 22%.

Alphabet recorded a net income of $6.65 billion, which was hurt due to an EU fine relating to anti-trust practices of €1.5 billion (~$1.7 billion). Excluding the fine, adjusted net income was $8.4 billion, falling short of previous year’s net profit of $9.4 billion. EPS of $11.90 was higher than the market’s forecast of $10.17.

By segment, revenues from Google properties grew 17% over the year to $25.68 billion. Revenues from its Network Members’ properties grew 8% to $5.45 billion. Other revenues for Google grew 23% over the year to $5.45 billion. Revenues from Other Bets grew 13% to $170 million.

Among operating metrics, paid clicks on Google properties grew 39% over the year but fell 9% over the previous quarter. Cost per click fell 19% over the year and grew 5% over the quarter. Within the non-Google properties, impressions on network members’ sites grew 6%, and cost per impression rose 1% over the year.

The disappointing revenue growth for Google has been attributed to the continued growth of competition in the maturing advertising market. Google has yet to develop an alternative business solution that can help drive both revenue and profitability growth. Analysts are also not happy with the explanation that Alphabet provided for the deceleration. Dan Niles, AlphaOne Capital Partners analyst believes that the results were a “black box” and the company was not giving a justifiable explanation for the miss. Some believe that the deceleration is on account of slowdown of YouTube. With added pressure of responsible advertising and content marketing, YouTube had adjusted its algorithm in the quarter to reduce recommendations. They also expect it to be an aftermath of the fourth quarter removal of over 2.4 million channels and 8.8 million videos from the channel.

Alphabet’s Focus Areas

Alphabet is focusing on three core areas – making information universally accessible and useful; computing, video and advertising platforms, and finally, hardware and cloud efforts.

To make information available, it is releasing several upgrades to existing technology. Duplex technology within Google Assistant can help users easily book a table at their favorite restaurant on all Android and iOS devices in 44 US states.

It released an improved job search experience in the US that allows people to discover remote jobs and for the Google news initiative, it released a local experiments project with local publishers to drive additional local content to readers.

Within computing, video and advertising platforms, it continues to see growth across the Android ecosystem and other computing platforms. During the quarter, it released the beta of Android Q that offers added privacy protections and provides new tools for developers to engage more users. It also released the Android Go Edition, that is an optimized version of Android that focuses on entry-level smartphones to deliver a secure experience. It also released a new gaming platform, Stadia, that will allow gamers to play advanced games on any type of screen instantly without needing to download the game or install updates.

For YouTube, its video platform, it continued to respect regulatory concerns and announced changes that reduce recommendations – a move that most likely impacted its revenue growth in the quarter. But YouTube’s reach continues to grow as it released YouTube TV nationwide and launched YouTube Music in India.

Within the hardware efforts, it saw demand for Google Home family of products to remain strong as it continues to optimize distribution and branding. Its phone is seeing growth with features like Night Sight in Pixel winning industry awards. Finally, Cloud business continues to grow as it drives new contracting and pricing to drive more enterprise customers to its platform.

Alphabet’s AI Focus

Alphabet is counting on AI to further accelerate growth. During the recent quarter, it began testing AI walking navigation in Google Maps that uses augmented reality to allow the phone’s camera to show the user where they are relative to the surroundings as they are walking.

During its Cloud Next 2019 conference, Google announced the launch of AI Platform, a one-stop shop for all its AI and machine learning assets. The platform will include services such as data preparation, training, tuning, deploying, collaborating and sharing of machine learning models. It will include an AI Hub that will act as a single stop for discovering, sharing and deploying ML models. The catalog will host a collection of models based on frameworks such as Tensorflow, PyTorch, Keras, XGBoost and Scikit-learn. Each of the models will be packaged in a format that can be deployed in Kubeflow, deep learning VMs backed by GPU or TPU, Jupyter Notebooks, or Google’s own AI APIs. The AI Platform is expected to be one of the most comprehensive offerings in the public cloud to train, tune and deploy machine learning models.

Alphabet’s Platform Strategy

Alphabet realizes that its growth in the advertising market is slowing down. To counter this growth, it is stepping up effort in the cloud and platform space. As part of this effort, it recently announced the release of Anthos, Google Cloud’s new open platform that lets users run applications both on-premise or on public clouds. Anthos will allow developers to manage workloads running on third-party clouds like AWS and Azure, giving them the freedom to deploy, run and manage their applications on the cloud of their choice, without requiring administrators and developers to learn different environments and APIs. As the Canalys report presented, Google remains a distant third with 6.4% market share in the cloud space following Amazon’s 31.5% and Microsoft’s 13.5% share for 2018. By enabling a cloud agnostic offering, Google will be able to address the requirements of organizations looking to implement a multi-cloud strategy.

The Google Cloud platform already provides a suite of tools and libraries that help developers build quicker. Its tools allow developers to manage resources from the command line, simplify debugging, and provide a solution for running API backends. Its SDK offers interactive command line tools to help developers manage virtual machines, Cloud SQL instances, deployments and also includes libraries for the Google Cloud APIs available in package managers like Maven, npm, and NuGet.

Google believes that the addition of Anthos will help its Cloud Platform attract a following similar to that of Android. It still has a lot of ground to catch-up on to get close to Amazon and Microsoft. Will its current efforts be enough remains to be seen.

Alphabet’s stock is currently trading at $1,184.14 with a market capitalization of $825 billion. It has fallen from the record high of $1,289.27 last month. Last December, when most technology stocks fell, Alphabet’s stock had fallen to a 52-week low of $970.11.

Photo credit: Thomas Hawk/Flickr.com.

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