Current Price: $2,727 Price Target: $3,100
Position Size: 4.6% TTM Performance:+75%
Key Takeaways:
- Broad beat – consolidated revenues were $61.9B, up 62% w/ meaningful op leverage – op margin hit 38% (of net rev), up from 36% in Q1 and 33.7% in Q4. Was high 20s pre-pandemic.
- Digital ad spending continues to surge – saw broad-based strength in advertiser spend as they lapped of the first ever revenue decline in their ads business last year
- Cloud strength continues – accelerated to 54% from 46% last quarter (mid 40s range last few quarters)
- Capex spending resuming – continuing to pick up the pace of investment in office facilities and data centers. Most recently announced a second cloud region in India, their 26th cloud data center region globally.
Several e-commerce quotes on the call…
- “Moving on to retail, where momentum remains strong. We’re continuing to build an open ecosystem that benefits both users and merchants. Last year, we removed financial barriers with free product listings and zero commission fees. This year, we’re removing integration barriers with Shopify, WooCommerce, GoDaddy and Square, merchants can now onboard and show their products across Google for free. And our Shopping Graph is using AI to connect these products to the people who want them with over 24 billion listings from millions of merchants across the web.”
- “Let’s talk omnichannel. Last quarter, I said it was here to stay and it is. Retailers continue to build their digital presence to drive both online and offline sales, and we’re helping them to do it.”
- “On YouTube, look, I mean, if you look at the engagement across the platform, we definitely see a lot of headroom for e-commerce. Over the past year, you’ve seen us really focus on accelerating a shift to in terms of onboarding merchants across Google. So we’ve definitely invested both in terms of bringing merchants on board, removing barriers there, providing better integrations by partnering with players, platform providers across the industry. And now we are investing in our consumer experience speed on Google search or on YouTube. And so you will see us roll out features over time.”
- “we’re working hard to build and open retail ecosystem. And that really levels the playing field for all merchants, and we think there is a lot of opportunity ahead.”
- “…interesting trend, people are more eager than ever to support their local small businesses. Searches for support local business are up like 20x last year in the US alone. And this is creating a lot of opportunity for SMBs overall.”
“Search & Other” revenue: $36B, up 68%
- Retail was by far the largest contributor to the YoY growth of their Ads business.
- Travel, financial services and media and entertainment were also strong contributors.
YouTube ad sales: $7B, up 84% YoY
- Over 120 million people watch YouTube on TVs every month; that’s up from ~100 million last year
- Potential for e-commerce to be a growth driver – they have number of shopping capabilities already underway, and working to make it easier for users to discover and buy directly on YouTube…“stay tuned for more updates later this year”
- Strong value proposition to advertisers & positioned to capture the shift in advertising away from linear TV
- YouTube helps advertisers reach audiences they can’t reach anywhere else (especially younger audiences)
- According to Nielsen data, on average 70% of YouTube’s reach was delivered to an audience not reached by the advertiser’s TV media. In other words, YouTube’s reach is becoming increasingly incremental to TV.
- Nielsen found that US advertisers who shifted just 20% of spend from TV to YouTube generated a 25% increase to the total campaign reach within their target audience while lowering the cost per reach point by almost 20%.
- So not only driving improved reach, but also helping brands do it more efficiently
Network ad revenues: $7.6B, up 60%. 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):
- Revenue grew 54% YoY to $4.6B w/ an operating loss of $591m
- GCP’s revenue growth was again above Cloud overall, reflecting significant growth in both infrastructure and platform services.
- Key differentiators helping their cloud strategy –
- Security – they pioneered zero-trust architecture; “increase in cyber and ransomware attacks is a wakeup call for the industry”
- Real-time insights – expertise in real-time data and analytics – key for their data cloud which is one of the fastest growing segments of the market.
- Expertise in AI & machine learning
- Industry-specific solutions
Other Bets
- Revenues were $192 million, the operating loss was $1.4 billion
- Waymo – launched services to the public in Phoenix last fall. Has now served tens of thousands of rides w/out a human driver in the vehicle.
ESG:
- They aim to operate on 24-7 carbon free energy by 2030
- Several of their data centers are already operating at ~90% carbon-free energy
Valuation – They generated $59B in FCF in the last 12 mos. and ended the quarter with $108B in net cash, that’s ~6% of their market cap. The stock is still reasonably valued, trading at a ~3.7% FCF yield on 2021. They have ~$43B remaining in their buyback authorization and have been stepping up their pace of buybacks.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109