Google recently reported a decent first quarter earnings, here’s what I took away.

Highlights

Consolidated revenues came in 12% higher YoY at $90B, driven primarily by Search & YT ads (up 10% respectively), offsetting declines in Google’s network revenues. This is a good thing for Google – Network ads are lower margin (higher [TAC] traffic acquisition cost) so as they make up less of advertising the company’s earnings will improve. Google Cloud revenues were also robust growing 28% YoY (this was a slight miss versus consensus of 29%). EBIT for the quarter came in 20% higher than last year in part due to margins expanding by 230 bps to 34%. The expansion we see on margins is partly explained by increases in the number of years infrastructure is depreciated against, revenue mix, and compensation recognition. Needless to say, this is a cash generating machine even when it seems to be counter-positioned.

Google Search

No commentary on Google is worth writing without consideration of Search’s position relative to ChatGPT and other chatbots. I continue to hold the belief that Google’s distribution advantage will protect the company from new entrants stealing their lunch in Search. In the earnings call there were a couple lines that stuck out to me:

Search revenues were up 10% YoY – not exactly the rate of growth you’d come to expect of a business in terminal decline. I believe this is because ChatGPT and other competitors haven’t found a way yet to get users prompting with commercial intent consistently. I believe that users still tend to use Google Search for searches where it matters which is suggested by the first quote above. According to Needham, only 20-25% of queries on Search are actually monetized with the remainder not generating Google any revenues (as of mid 2024).

Since GPT, Google has defended Search with AI Overviews, Lens shopping, and Circle-to-Search. Lens shopping is completely incremental revenue, respectably growing (10%), and is indicative of the opportunities advancements in ML can have for the business.

Monetization Metrics

It is worth speaking on monetization metrics of the search business. There are only a few ways in which Search & YouTube can grow revenues: (1) increase ad loads (2) increase time spent per user (3) increase user count (4) increase advertiser spend with improved targeting. I found this graph (see below) interesting on the historical path of growth in paid clicks and cost-per-click.

Since GPT, paid clicks have been falling with cost-per-click rising. The volume of paid clicks plateauing is cause for some concern. However, if we go by Schindler’s words (earlier quotes), then this could be reasoned to be the result of better ad-targeting resulting in higher costs for advertisers (cost-per-click). To me, fewer clicks aren’t necessarily a bad thing (would still want it going up) if those clicks are more valuable (but we don’t know if that is the case or if this is Google squeezing advertisers). If this trend continues to persist (even in an during an unkind macro backdrop) then yes – it would be fair to say targeting has improved. After all, advertisers won’t continue spending if the are not getting a satisfactory ROAS.

I’m certain there will be some cannibalization on commercial queries as ChatGPT and other services improve. The question is will the new revenues from AI offset both the cannibalization and the increased costs of serving queries with AI?

Size of Google + Wiz

In other news, Google announced their intent to purchase Wiz a cybersecurity company for $32B (or ~65x sales)! From what I’ve read Wiz seems to be ran by competent individuals and could be a good differentiator for Google’s Cloud business. These big tech companies command such large market caps that what should be a large purchase is not all that much. Google trades for ~$2 trillion so the Wiz acquisition is ~1.6% of market cap. To compare the size of the acquisition you could imagine a $2 billion company acquiring a $32 million business. I don’t have a clue if the nosebleed price they seem to be paying will be worth it but it is important to note this won’t be the end of the world should it go wrong.

Disclaimer: I own shares in Alphabet.