Google Will Remain Oxygen of the Internet

Google Will Remain Oxygen of the Internet

Google shares traded off ~3% in after-hours trading as investors weighed the benefits of impressive revenue stability (essentially 21% in each of the past 12 quarters) against the prospect of increased costs related to mobile traffic acquisition and YouTube TV content.

Bottom Line: Google remains the oxygen of the internet and will maintain that distinction as the company brings the benefits of AI to all of its nearly 50 consumer-facing products in the years to come. Separately, the company is prudently balancing between near-term earnings and investing for long-term revenue growth.

Our takeaways:

  • Google is the definition of revenue growth stability. Revenue was up in 22% in Dec-18, 23% in 2018, 23% in 2017 and 20% in 2016. The company is investing to support long-term revenue and earnings, particularly in machine learning to support new and existing (Cloud, Hardware, and YouTube) businesses.
  • In 2018, operating expense grew faster than revenue, 31% compared to 23%. In 2019, the Street expects that to reverse, with roughly a 10% growth in cost and 20% growth in revenue. While the company’s exact expectations about the mix of revenue and expense growth for 2019 were unclear, we remain confident that revenue will grow faster than expenses. In the coming quarter, we expect investors will increasingly view this shift as a positive.
  • We believe Ruth Porat’s comments support such a shift. In particular, the comment: “On the other hand, expect Capex and hiring rate to slow meaningfully this year.”
  • Overall, the call had a subtle tone of confusion from the analysts, as there was a mixed message on the pace of investments. On one hand, Google is investing more in Cloud, Hardware, and YouTube. On the other hand, Capex and hiring rate growth is expected to slow as outlined above.
  • The most important metric is paid clicks which were up 66% y/y vs 62% in Sep-18. While click growth increased, price per click was essentially flat at 29%. The mix of these metrics is on a positive trend.
  • Google shared that it now has 8 products with more than 1 billion users each.
  • Privacy is going to be an important concern for tech in 2019. Google’s comments on the call today:

“Providing accurate and trusted information at the scale the Internet has reached is an extremely complex challenge and one that is constantly getting harder. But we have 20 years of experience in these information challenges and it’s what we strive to do better than anyone else. As we do this, we feel a deep sense of responsibility to do the right thing and are continuing to build privacy and security into the core of our products keeping users data safe and secure with the industry’s best security systems and giving people better and clearer controls. You’ll see us continue to do a lot more here in 2019.”

  • Sundar Pichai opened up his portion of the call with: “Last year, we set out to bring the benefits of AI to everyone through our products, and I’m proud of the tremendous progress we made… AI is helping people get things done every day.” AI was mentioned 15 times on the call today, the lowest number since we began tracking a little over two years ago. Here’s how the use of AI on Google earnings calls has trended over the past two years.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Artificial Intelligence, Google