Google braved one recession, and Alphabet is more diversified as coronavirus roils rivals

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This article is part of a series tracking the effects of the COVID-19 pandemic on major businesses, and will be updated. It was originally published on April 8.

Alphabet Inc.’s Google lords over the online-advertising market, which is both a blessing and a curse in the age of coronavirus.

The core business of Alphabet GOOGL, +0.42% GOOG, +0.23% commands roughly 30% of the $110 billion digital-advertising market world-wide, and is expected to maintain that lead in 2021 and beyond, according to eMarketer. YouTube is a big reason why, as it is expected to haul in $9.33 billion in 2020 and $11.4 billion in 2021, according to eMarketer. In February, Alphabet disclosed it brought in $15.1 billion in ads through YouTube in 2019, and $8.9 billion via Google Cloud.

If there is one company that will initially be hit hardest by ad cutbacks, it’s Google. Up to 40% of its revenue comes from categories hard hit by COVID-19: in-person retail, restaurants, travel, automotive and small businesses. But it is also likely to be the first to rebound because of its market leadership.

Business in the age of COVID-19: Read profiles of how other large companies will be affected by the coronavirus

Google has been here before, when it wasn’t named Alphabet. During the recession sparked by the subprime-loan crisis a decade ago, sales remained at single-digit growth for five quarters in a row. Google’s revenue estimates declined at least 15% in 2009 and 2010, with a marginally greater earnings hit, according to analysis by MKM Partners.

Then again, Google had the field all to itself more than a decade ago, before Facebook Inc. FB, +2.66%, Snap Inc. SNAP, -0.37%, and Twitter Inc. TWTR, +3.15% emerged as online ad rivals.

“Back then, I was told at the time the recovery is quicker than you think it is when you get there, and the strongest companies recover quicker than the weaker ones,” former Google Chief Executive Eric Schmidt said in a Zoom ZM, -6.08% conference with business executives, investors and media on April 7.

Analysts seem to agree, painting a picture of short-term pain but a quick recovery for Google.

“We are modeling a [year-over-year] decline in Google revenues in Q2 followed by a continued acceleration in revenues [in the second half],” MKM Partners analyst Rohit Kulkarni said in an April 3 note. “However, we do not expect Google to return to double-digit revenue growth until Q1 ’21.”

“To put this delicately, use the opportunity of the crisis to reconfigure and ensure the decisions you make now make you stronger when this lifts — a year or maybe less,” Schmidt said.

In 2008, for example, Google repriced stock options to employees to stabilize its workforce and retain talent.

“It was the right decision at the time,” Schmidt said.

Since the last recession, Google has also acted to diversify its business beyond search ads, with YouTube and Cloud accounting for more than 40% of incremental growth, MKM Partners reported.

Alphabet reports fiscal first-quarter results April 28.

How the numbers are changing

Revenue: Average analyst expectations for the first quarter were $43.17 billion at the end of 2019, but have declined to $42.08 billion as of April 6. Estimates for Google websites, which account for most of Alphabet’s revenue, have declined from $30.32 billion to $29.73 billion in that time period, according to FactSet. For the full year, analysts expect revenue of $181.9 billion.

Earnings: Average analyst expectations from FactSet were $12.31 per share at the end of 2019. As of April 6, they were $11.24 per share. For the full year, analysts expect earnings of $48.90 as share.

Stock movement: During the first three months of 2020, Class A shares declined 13%. Google crested at $1,519.44 on Feb. 18, and closed at $1,183.19 on April 6.

What the company is saying

Not much. Notoriously tight-lipped Alphabet executives haven’t said anything of note — either in SEC filings, news releases or blog posts — about the economic impact of coronavirus. What they have shared is mostly about a surge in traffic coursing over its network, prompting it to boost capacity to handle demands on its network and data centers.

April 23: Google confirmed it is slashing its marketing budget by as much as half in the second half of the year, and has imposed a hiring freeze for full-time and contract employees, to reduce spending the rest of the year.

April 15: Alphabet broke its long silence on COVID-19, when Pichai revealed in a leaked memo that the search giant expects to cut hiring as well as spending in other areas, such as data centers. “We believe now is the time to significantly slow down the pace of hiring, while maintaining momentum in a small number of strategic areas where users and businesses rely on Google for ongoing support, and where our growth is critical to their success,” Pichai said in the memo.

See also: Google to cut back on hiring, other spending due to coronavirus, Alphabet CEO says

April 3: “Our priority now is how to meet the surge in demand,” John Jester, vice president of customer experience at Google Cloud, told MarketWatch in a phone interview.

In a blog post on March 31, Google Cloud CEO Thomas Kurian said traffic on its premium videoconferencing property Meet has grown 60% day-over-day and is topping 2 billion minutes a day — 25 times the traffic of a typical day.

Feb. 4: Until the last two quarters, Google was conspicuously silent about breaking out revenue figures by product division. During its fiscal fourth-quarter, it said YouTube was at $15 billion in annual ad revenue, and Cloud is on a $10 billion revenue run rate.

See also: YouTube, Google Cloud revenues finally revealed

What analysts are saying

• Online advertising is half of global advertising, and Google has roughly 40% market share of online advertising. The math points toward an inevitable short-term disadvantage to Google, but a speedy recovery because of its clout, according to MKM Partners. “We expect Google advertising revenues to decelerate from ‘high teens’ (18% to 20%) during 2019 to 4% in 1Q:20, -1% in 2Q:20, and approx. +4% in 4Q20. We are raising our Google Cloud revenue assumptions as we expect continued acceleration in cloud, driven by sales force expansion and healthier end markets.” — MKM Partners analyst Rohit Kulkarni, maintained his buy rating while trimming Alphabet’s price target to $1,400 from $1,600 on April 3.

• “We expect Google to have a greater near-term disadvantage but also have a faster recovery as pandemic effects reduce… We believe Alphabet will be more resilient vs. Facebook in weathering the advertising decline due to its lower exposure to the [small business] advertiser base. As a result of these top-line changes, our 2020 GAAP EPS estimate is now $40.56 (vs. prior estimate of $53.47) and our 2021 GAAP EPS is now $54.30 (vs. prior estimate of $66.” — Citi analyst Jason Bazinet, maintained a buy rating while trimming Alphabet’s price target to $1,400 from $1,700 on April 1.

Originally Published on MarketWatch


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