Alphabet is a conglomerate of companies. The largest one and most known is Google . Which was created not as a conventional company and not intended to become one. All non-Google businesses collectively reported as Other Bets (Access, Calico, CapitalG, GV, Verily, Waymo, etc). Google is the only one discloses financials publicly. None of other Alphabet business segment meet the quantitative thresholds in order to quality as reportable segment.
Alphabet Inc overview
The main idea behind Google success is to provide access to world’s information in most useful and relevant way. Since company’s inception in 1998 main idea shifted from helping people to find answers to help people get things done. Changes in technology tend to be revolutionary and not evolutionary. That’s why Alphabet invested in countless technology start-ups that can revolutionize different aspects of life. Last few years machine learning and artificial intelligence are driving most of latest innovations.
Alphabet’s core products and platforms have more than one billion monthly active users. Google Maps revolutionized how we see and navigate the world. Google voice search help to get immediate answer even without touching the phone. Google Drive helps us to manage all important (and sometimes useless) files. Google photos insure that precious moments will be safe even if phone does not work anymore. Android by Alphabet ensure that you can read this article. YouTube gives you access to almost unlimited collection of videos that available all year round. Google Play Store ensure that apps for your phone are safe to use. Chrome browser provide the best possible experience while browsing the Internet. Google Cloud Platform and G-Suite provide all necessary tools for all size businesses to tak advantage of the latest technology.
Billions+ monthly active users are tremendous opportunity to test and find out the best products and services for customers. Users safety taken seriously by providing Incognito mode and chance to delete search history.
Alphabet is a profitable company and generate most of revenue by delivering relevant ads in right moment to users. Primarily ad revenue comes from brand advertising and performance advertising. For online marketers created tools to measure advertisement effectiveness. Performance advertising it’s about showing relevant ads that user will clock on. Most advertisers pay when user click on ad. Brand advertising creates user’s awareness about brand through videos, images, blogs, reviews, etc. Brand advertising target specific audience. Every year revenue from ads increase because digital economy evolving. Shift from offline to online life resulted in high demand for targeted ads that resulted in higher revenue.
Alphabet made long-term investments in order to grow revenue beyond advertising. Company invested in countless emerging businesses at various stages of development. In financial report all other businesses classified as Other Bets (operate as independent companies).
Alphabet invest heavily in operating and capital expenditures. Research & Development investments fone with strategic focus on ads, cloud, AI, machine learning.
Company’s non advertising revenue comes from in-app purchases, sales of apps, licensing and service fees, subscriptions, digital content products. In 2019 Alphabet generated 83% of total revenue from a advertising and only 17% from non advertising.
There’s always competition because fast growing companies come with disruptive technologies (it’s the only way for other companies to survive competition with Alphabet). For Google search engine main competitors are Baidu, Bing, Yandex. E-commerce webs and vertical search engines (Amazon, EBay, Myntra, online trip generating services, LinkedIn, etc) give to users chance to navigate directly to needed content without search in Google. Social media (Instagram, Facebook, Twitter, Snapchat, TikTok, etc) because users don’t need to search for products and links in traditional way through the search engine. Google Adsense competitors. Google Cloud competitors (Amazon, Microsoft, Alibaba, etc). A few other companies made digital assistants popular and they are strong competitors.
Google’s business revenue is seasonal and depends on customers’ seasonal demand. Advertising expenditure also depends on season.
Majority of new customers that purchase their first gadget, purchase smartphone. It’s not like it used to be 10 years ago when customer first bought computer and after some time smartphone. Number of users that access to Internet through the smartphone in all time high. Low cost mobile devices increase demand for online ads.
Alphabet company rely on various intellectual laws, trademarks, domain names, copyrights, patents, etc. Company licenced and will continue to licence certain rights to partners. Intellectual property right might not be available in every country where Company operates. Company may not register some patents that in future may became important for growth, also patents could be deemed invalid or unenforceable due to various reasons. Some intellectual property rights kept as trade secret. Word “Google” could became synonymous to word “search” and Company may loose trademark on it. Protection of intellectual property is time & money consuming task.
As of Dec 31, 2019 in Alphabet company worked 118,899 full time employees. Company always search for qualified employees because of this competition is intense. Company rely on Sundar Pichai as a visionary and head of the company. Other key employees have huge influence of future of the company. In this industry competition is high and all other competitors search for highly qualified individuals (sometimes propose higher paycheck).
All suppliers and partners must follow Google Supplier Code of Conduct.
Since 2007 Google is carbon neutral company that operates energy efficient data centers. In 2018 Company matched 100% of it’s electricity consumption by using renewable energy sources. In 2019 Company singed 18 new energy deals for 1600 megawatts which is equal to $2 billion in new renewable energy infrastructure construction. In 2019 all shipments to Google customers are carbon neutral and contain recycled plastics.
Here’s a list of main risks for Alphabet Inc, Google and other small companies under the corporation (based on 10K report):
- In 2019 company generated 83% of total revenue from advertising. It’s huge benefit as well as risk factor. If online advertisers reduce spendings than company’s revenue will be lower.
- In 2019 54% of consolidated revenue came from international business activities.
- Increase in non advertising revenue.
- Limited access to the Internet. Could be done by government (like in India while violent times)
- If technology that block ads will be available for users than Google will display less ads and generate less profit.
- Advertising expenditures are cyclical, seasonal and based on customers purchasing patterns.
- Intense competition because of rapidly evolving business environment.
- Revenue growth could decline because.
- Cost of building new infrastructure.
- Aggressive initiation of intellectual property claims.
- YouTube ads revenue growth and paid subscription services.
- Risks related to cloud services, maintenance costs, cost of new infrastructure, etc.
- Risks related to manufacturing and supply chain.
- Unsold products and services. This may affect materials cost as there’s minimum purchase order and price linked to it.
- Increase in tax.
- Quality issues.
- Risks related to new technologies, products, new businesses.
- Risks related to acquisition of start-ups and other small businesses.
- Risky investments in healthcare, life sciences, transportation, etc.
- AI & machine learning risks.
- Data privacy.
- Intellectual property rights, patents, trade secrets, trademarks, domains, etc.
- Short products life cycle.
- Changes in law and regulations (in US or any other country).
- Changes in tariffs, barriers, import & export requirements, customs classification.
- Foreign currency exchange rates.
- Company may loose trademark on word “Google”.
- Other manufacturers may choose (or pushed to) not include Alphabet products on their devices. Prime example is Huawei.
- Products and services might be misused.
- Low quality user’s generated content.
- Company is a subject to government investigations, claims, suits, legal liability, etc.
- Risks related to shares, shareholders and long-term share value.
- Tri-class capital stock structure.
- Unpredictable situations.
Alphabet Inc stock structure
Since 2018 Alphabet Inc authorized three times repurchase of it’s C class capital stock ($8.6 billion, $12.5 billion and $25 billion). As of Dec 31, 2019 there’s still remains available $20.8 billion for repurchase of C Class capital stock. Repurchase program does not have an expire date and shares buyback may increase volatility.
Alphabet use super voting stock structure:
- Class A common stock has one vote per share.
- Class B common stock has 10 votes per share.
- Class C capital stock has no voting rights.
This stock structure gives to holders of Class B common stock 10 times more voting power (decision making power) than to Class A common stock share holders. That investors who hold Class C common stock has no voting power whatsoever.
Larry Page and Sergey Brin (as of Dec 31, 2019) owned 84.3% of Class B common stock (with super voting power) that represent 51.2% of the voting power in Alphabet. Co-founders have significant influence on decision making process. Decision over acquisitions, joint ventures, investments made by co-founders.
Shares could be more volatile because earnings announcement could be not in line with market expectations. Industry experts opinion about company’s products and services could affect the business results and revenue. Buyback program creates particular perception about the stock. Marker players speculations could result in high volatility.
Price of Class A, B, C common stock is different. On screenshot represented 5 years cumulative total return for Class A common stock. As we can see Alphabet Inc generated higher cumulative total return in 5 years than S&P 500, NASDAQ Composite and RDG Internet Composite. Cumulative total return on Class B and Class C stock also generated high returns (almost the same as Class A stock).
Alphabet Inc financial results for fiscal year 2019
Alphabet Inc is a profitable company, audit done by Ernst&Young.
- $161.9 billion revenue.
- 18% yearly revenue growth.
- $98 billion Google search & other revenue.
- $15 billion YouTube ads revenue.
- $21 billion Google advertising revenue.
- $9 billion Google Cloud revenue.
- $17 billion Google other revenue.
- $659 million Other Bets revenue.
- 11% Other Bets revenue growth year over year.
- $455 million hedging gains.
- $18.4 billion marketing and sales expenses.
- $9.4 billion general and administrative expenses.
- $71.9 billion cost of revenue.
- $51.7 billion operating expenses (excluding cost of revenue).
- $54.5 billion operating cash flow.
- $23.5 billion capital expenditures.
- $34.2 billion income from operations.
- $5.4 billion other income.
- 13% effective tax rate.
- $34.3 billion net income ($49.16diluted net income per share).
Googles advertise revenue consist:
- Google search & other. Revenue generated from Google search properties, including revenue from traffic, Google Play, Gmail, Google Maps, etc.
- YouTube Ads (in 2019 generated more than $15 billion revenue).
- Google Network Members.
One of the most important revenue defining monetization strategy is paid clicks and cost-per-impression. In 2019 the number of paid clicks increased because of growth in user’s technology adoption. Cost-per-click reduced by advertisers. Cost-per-impression increased due to growth if AdManager.
In 2019 cost of revenue increased: $30 billion TAC, $42 billion Other Cost of Revenue (payment to content providers, subscription services, Google Play Store fees to content providers, data centers expenses, inventory related cost,etc). 44.4% is a total cost of revenue as a percentage of revenue. Company have significant number of properties.
In 2019 EC imposed €4.3 billion fine because of violation of EU competition law by Android related distribution agreement. In 2019 EU imposed €1.5 billion fine for violation of EU competition law (fine related to Adsense for partners).
Quarterly result available on screenshot and publicly available in Alphabet Inc website and SEC (Securities Exchange Commission United States).
In 2019 Alphabet singed the agreement to acquire Fitbit for $7.35 per share ($2.1 billion total purchase price). Expected that acquisition of Fitbit will be completed this year.
Alphabet Inc sources of liquidity: cash & cash equivalents, cash flow, marketable securities. Commercial papers up to $5 billion is used to finance short-term debt. As on Dec 31, 2019 there’s was no outstanding commercial papers.
In 2019 Alphabet acquired Looker (unified platform for business intelligence, analytics) for $2.4 billion but some permission from regular still pending. In 2019 Alphabet completed a few more acquisitions and purchases for approximately $1 billion.
Report filed with SEC gives insight into the Company, operations, financials, etc. This article is based on 10K report. Full report available in office website of Alphabet Inc and SEC.
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