Alphabet – Advertising weakens, cloud grows significantly.

Last Updated: 13. Februar 2024By

Just a few days ago, Alphabet, the parent company of Google and YouTube, reported its numbers for the past fiscal year. Revenue and profit once again reached record levels. However, investors and analysts were quite disappointed as the momentum in the advertising business is slowing down.

New records in fiscal year 2023 This is actually a golden balance sheet โ€“ once again. Revenue in fiscal year 2023 increased to $307 billion, an impressive 9% more than the previous year. Profit also grew disproportionately to $84 billion, an increase of 13% compared to fiscal year 2022.

What concerns investors and analysts: In the last quarter, while revenue increased by 13% compared to the last three months of the previous year, the advertising business only grew by „only“ 11%. The crucial point: Advertising revenue grew slower in the fourth quarter than in the rest of the business areas.

But the main concern is that it falls significantly behind the growth of its main competitor Meta Platforms, which saw a nearly 24% increase in advertising revenue in the last three months of the previous year. Does this mean that Alphabet is slowly falling behind its main competitor Meta? Probably not! And there are two reasons for this.

First reason: Google dominates the search engine market When someone needs a tissue, they say „Kleenex“, and when they need a household roll, they probably say „Zewa“ โ€“ even though there are countless no-name products for both. And when someone is looking for information on the internet, they don’t search for information, they „Google“ it. This has turned product names into generic terms in everyday language.

It’s no surprise that Google has the largest market share among search engines. According to reliable sources, nearly 85% of internet users searched and found information on Google last year. Bing has a market share of nearly 9.20%, Yahoo has over 2.7%, YANDEX has almost 2%, DuckDuckGo has nearly 0.8%, Baidu has nearly 0.5%, and Soguu has around 0.35%.

Even the early use of AI by Microsoft’s search engine Bing did not cost Google much market share. Especially since the market leader quickly caught up with its own AI to tailor its search results even more to consumers and increase its advertising revenue. Of course, no one knows for sure if and how the market share of search engines will change and shift in the next five years.

Second reason: Alphabet’s cloud business is growing strongly In the past fiscal year, Alphabet’s cloud activities generated around $33 billion in revenue and accounted for more than 10% of total revenue. Cloud revenue grew by 26% compared to fiscal year 2022. A truly impressive growth rate.

The cloud profit may seem small compared to the total profit at $1.7 billion. But the potential is huge. For comparison: Amazon made nearly $25 billion in operating profit with its cloud activities in 2023.

For the sake of completeness, Alphabet is significantly expanding its activities in the area of „autonomous driving“ through its subsidiary Waymo. In early September of last year, automotive supplier Continental announced a partnership with Google/Waymo in the field of AI. In the next two years, Google Cloud connections will be integrated into vehicle computers.

The area of autonomous driving promises enormous revenue and profit growth in the future. For example, Mercedes-Benz is cooperating with Microsoft to optimize its own voice assistant MBUX using the GBT chatbot. The VW software subsidiary Cariad acquired the AI specialist Paragon Semvox last year. The plan is to develop an AI-based voice control that will eventually also respond to facial expressions and eye movements.

What about Alphabet’s stock? The shares (WKN: A14Y6F) of Google’s parent company gained nearly 50% in value last year. The shares are currently trading at around $148, almost recovering from the dip in late January after the annual figures were released, which pushed the stock down to $140.

The Alphabet stock (formerly: Google) is an investment with a golden touch, despite all the volatility in the past. In the last ten years, the total profit has accumulated to more than 400% (in US dollars). For Euro-oriented investors, this translates to a gain of almost 550%. In my opinion, the Alphabet stock is still worth buying and not overvalued. With a price-earnings ratio (PE ratio) of an estimated 22 for the current fiscal year, according to analyst consensus, and 19 for the year 2025, the shares are almost cheap. Especially: currently a bit cheaper than Meta’s shares.