GOOG Q1 Earnings Update

Current Price: $2,434     Price Target: $2,750 (increased from $2,210)

Position Size: 4.6%         TTM Performance:+96%

 

Key takeaways:

• Broad beat with total net revenue up 35% on search growth accelerating to +30% YoY and YouTube accelerating to 49%.
• Digital ad spending surging – seeing broad based growth in ad revenue as companies return to spending with vaccine rollout.
• Cloud strength continues – revenue +46% YoY with segment losses narrowing
• Capex spending resuming– after reducing spend on offices and data centers last year, they are resuming their spending levels. Notably, they largely plan to return to the office in September and not maintain a big WFH presence. Lots of tech firms coming out w/ greater degree of return to office than expected.
• Big buyback announced – $50B repurchase authorization announced.

 

Additional Highlights:

• Some quotes from the call…

• “data suggests that investment in startups is at an all-time high”
• “we are seeing an acceleration in the shift to digital”
• “consumers are spending more time online, they’re buying more online, they were willing to try new brands and they’re eager to support local businesses, SMBs. So, searches for support local businesses are up significantly since last year. And we’ve been focused really on helping SMBs with simpler tools, so they can actually embrace digital a lot faster. And that’s where we have really invested over the year, making everything simpler. We had a very wide range of solutions to help them get online, get discovered across all of our key products, Search, Maps, YouTube and so on. And there is multiple, multiple fascinating stories from them coming back to us.”

• More ad tailwinds to come…

• Consumer activity ramping as global economy re-opens, aided by government stimulus
• Hardest hit industries, like travel, brick-and-mortar retail, restaurants and entertainment, are significant sources of ad spend and are just starting to ramp back up
• Some geographies further behind on re-opening or facing renewed shutdowns w/ a re-acceleration of cases, so ad spend recovery is delayed
• SMBs are becoming more digitally capable post-pandemic

• TAC – Total traffic acquisition costs down slightly. Content acquisition costs for YouTube are a big driver of this.
• Op margin expansion: sizable operating leverage again. Q1 operating margin was 36% (off of net rev), up 230bps QoQ.
• No commentary on 2H outlook – “it is too early to tell” how consumers  will  behave. However, they have some easy compares ahead and broad ad momentum as the global economy re-opens in stages and marketing budgets ramp up.
• “Search & Other” revenue ($32B) accelerated to +30% (from +17% last quarter).

• Particular strength in retail (local searches +80% YoY)
• Seeing strong interest from users looking to plan their next trip, even before they’re ready to book. GOOG helping airlines add routes in response to consumer destination interest.
• Maps will be adding over 100 AI powered improvements this year, such as indoor live view, which helps you navigate airports, transit stations and malls using augmented reality.
• Google News Showcase – their $1 billion investment in the news industry…they’ve added more than 170 publications across 12 countries with more coming soon. Trying to get ahead of regulators.

• YouTube ad sales ($6B) were +49%,

• YouTube Shorts, their competitor to TikTok, logged 6.5 billion daily views as of March, up from 3.5 billion at the end of 2020.
• According to a recent study by Ipsos, 77% of respondents said they used YouTube in 2020 to learn a new skill.
• Growing faster than search revenues as advertisers are turning to streaming platforms like YouTube to reach people who are no longer watching TV and as audiences become more fragmented. 
• In the U.S., >100 million people watch YouTube and YouTube TV on their TV screens each month. 
• YouTube helps advertisers reach younger audiences they can’t reach anywhere else – YouTube reaches more 18- to 49-year-olds than all linear TV networks combined.

• Network ad revenues: $6.8B, +30% YoY. This is revenue from ads placed on sites other than their own, like an ad placed on the NYT site.
• Google cloud = Google Cloud Platform (“GCP”) + Google Workspace (i.e. collaboration tools): was $4B, +46%.

• They don’t break out GCP growth separately. All we know is the growth rate was again “meaningfully above” the Cloud segment overall. Very positive commentary on GCP – they are accelerating their investment in this business.
• Called out 3 trends driving their strong cloud results…

1. Data cloud – their expertise in real-time data, AI & ML are helping them win customers like Twitter and HSBC
2. Customer focus on operational efficiencies & reduction of IT costs in a multi-cloud environment
3. Hybrid work – GOOG continues to deliver helpful innovations to enable hybrid work with Google Workspace. This includes digital tools for front line workers like nurses and retail store workers, as well as new security offerings. These innovations have helped grow their revenue per seat and the number of seats in the last quarter.

• Capex – will be up YoY after big cuts last year. In 2021, in the US alone, they plan to invest over $7 billion in offices and data centers
• ESG – Continue to make progress on their sustainability goals. They matched their operations with 100% renewable energy for the past four years and they are working towards operating on carbon-free energy round the clock by 2030.
• Valuation – They ended the quarter with $110B in net cash, that’s ~7% of their market cap. The stock is still reasonably valued, trading at a ~3.4% FCF yield on 2021.

 

 

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