Google Lays an Egg

It’s not that easy to make money in big tech these days – that is what the big takeaway was with the Google (GOOGL) or Alphabet earnings report that came out after the close yesterday.

The glory years are long gone.

First, it was almost like Groundhog Day with the Netflix-like streaming catastrophe that has now victimized yet another tech company.

YouTube competes differently with other streamers and is reliant on the digital ad model which is why an ad shows every 10 seconds when we watch YouTube.

I know it’s annoying but that’s how they grow revenue, and the blame was squarely attributed to China’s TikTok which is a short-form video platform eating everyone else’s lunch.

YouTube led all platforms in the first quarter of 2022 when respondents were asked which platform they used most often for mobile video, but YouTube dropped to 35% of respondents vs. 45% in the first quarter of 2021 while TikTok was #2 with 22%.

Besides, YouTube is literally entertainment, and with the health situation normalized again and the weather heating up, don’t blame others for grabbing a beer or two with their friends whom they haven’t seen for ages.

That clearly doesn’t help the YouTube ad revenue when people are out and about.  

Google will need to deal with this TikTok problem because it’s real and it’s not disappearing anytime soon.

Google has a TikTok copy called YouTube Shorts and it’s not going that well if we compare it to TikTok which has surged to well over 1 billion subscribers.

If management allows the platform to get stale, it could become another dying tech company like Facebook.

The sum of the parts wasn’t particularly impressive either and that is weird to say based on Google’s history of outperformance.

Investors almost never see them miss on the top and bottom line and the EPS miss was not even close.

Things are getting more expensive for all of us, and Google just laid bare what we knew it our guts.

Just look at their research and development spend, it went from $7.5 billion to $9.1 billion which is a $1.6 billion increase in nominal spend.

They are also getting less revenue from Google Play which lowered developer fees to 15% or less for 99% of apps, down from 30% previously.

The bright spots were search advertising and cloud businesses.

Google Cloud has been growing quickly, but still remains unprofitable. It grew sales 43% for the first quarter to reach $5.8 billion, which was about in line with expectations. However, operating losses were wider than expected at $931 million.

Investing aggressively in the cloud is Google’s silver bullet, and that’s clearly having an impact in terms of the free cash flow numbers as well as the higher expenses and the margin compression we’re seeing not only in that segment but in the broader business.

Big Tech is decelerating, and external forces are magnifying the weakness in growth.

I do believe much of the negativity has been priced into GOOGL’s stock and this isn’t the case of a broken business model like Netflix (NFLX) or Facebook (FB).

I believe GOOGL shares will have a positive second half of the year.