Editor’s note: What’s driving the continuing growth at Internet giant Google? Technology Business Research analyst Jack Narcotta offers his insight after reviewing Google’s latest financial report.
HAMPTON, N.H. – Google’s 2Q16 performance highlights the company’s success in asserting leadership in mobile, video and programmatic advertising markets as well as driving greater participation from advertisers across its Chrome and Android platforms. Greater mobile user engagement fueled a surge in advertising revenue, propelling Google’s overall revenue and profits to record levels for the company.
Google’s revenue, gross profit and operating profit climbed 21.3%, 20% and 23.7% year-to-year to $21.3 billion, $13.4 billion and $6 billion, respectively. Revenue and profit growth would have been larger if not for the impact of foreign exchange rates against the U.S. dollar; per Google, currency fluctuations robbed it of an additional $790 million in revenue in 2Q16, and TBR expects exchange rates will influence Google’s growth through 2017, as revenue outside the U.S. generally accounts for more than half of the company’s total revenue each quarter. The result of the European Union (EU) membership referendum for the United Kingdom to leave the EU will also adversely impact Google through 2017, as that country typically generates between 8% and 10% of Google’s total revenue each quarter.
However, TBR believes Google (Nasdaq: GOOG) is well-equipped to capitalize on users shifting their search and internet habits from desktop PCs to mobile. Mobile advertising, especially YouTube video advertising with its Google Preferred channels and TrueView ads, was the primary driver of revenue growth. While Google also invests profits in experimental, long-term technologies as a means to discover its next successful business and performance from its desktop search business remains steady, the company’s top priority through 2017 will be ensuring sustained growth in mobile advertising and fostering greater user engagement across its diverse portfolio of applications and services.
Facebook is charging hard at Google in mobile advertising markets, but Google’s scale is an effective shield
Google does not dominate mobile advertising as it does PC advertising; Facebook is Google’s strongest competitor, and for good reason. Earlier in July 2016 Facebook reported 81% year-to-year growth in mobile advertising revenue, to $6.2 billion, and active Facebook users surpassed 1.7 billion. By comparison, at $19.1 billion in 2Q16, Google’s advertising revenue scale is triple that of Facebook’s. However, while strong growth from Facebook is a challenge, it has inspired innovation at Google and validated the mobile-first initiatives it has aggressively implemented since 3Q15.
As people spend more time on their mobile devices, increasing mobile advertising revenue is critical for the company. The priority of Google’s entire internet advertising infrastructure and traffic acquisition initiatives — Google’s “supply chain” — is to capitalize on advertising opportunities across any and all mobile devices, and direct internet traffic and user engagement through its networks and services.
While Google does not report mobile advertising revenue, company officials said mobile advertising had strong growth, and TBR believes the gap between mobile and PC advertising revenue is closing quickly, aided in particular by “significant” revenue growth in YouTube advertising revenues. Increasing YouTube watch time is important to the company, especially as the multimedia platform offers several advertising opportunities across audio, video and website links from a single page. As goes mobile and video advertising demand, so goes Google.
Mounting operating losses from Google’s Other Bets segment are not a concern — yet
Alphabet, the conglomerate that is the parent company of Google and several other subsidiaries previously owned by Google such as Fiber, Calico, Nest and Verily, reported in 2Q16 its Other Bets segment, which is composed of “moonshot” initiatives and research into cutting-edge technology, generated $185 million in revenue, up from $74 million in 2Q15, led by Nest (smart thermostats for the home), Fiber (fiber optic internet service) and Verily (life sciences). Legitimate, albeit small, businesses are emerging from Google’s risk-friendly incubator.
However, increased investment into these businesses, as well as the other pre-revenue businesses in Other Bets, is generating wider operating losses. Other Bets operating income fell 30.2% year-to-year in 2Q16, erasing $859 million, or 12%, from the $7 billion in operating income generated by Google’s advertising business.
TBR believes the scale of Google’s advertising business and the profits that segment produces will compensate for some of these moonshots, and Alphabet will continue to allow Google to freely invest in the technological and human capital necessary to pursue these investments emerging in life sciences, medicine, robotics, natural language interfaces, alternative internet service delivery and autonomous cars.
However, TBR expects Google will be increasingly mindful of the impact wider operating losses from these moonshots will have on its overall business. Sustained and greater losses will, as is typical for Google, compel it move quickly to rein in or even halt allocating investments into areas it deems as nonessential or under-performing assets.
(C) TBR
