Wall Street asks for YouTube, Cloud margins


Google CEO Sundar Pichai speaks during the Google I/O keynote session at Shoreline Amphitheatre in Mountain View, California on May 7, 2019.

Josh Edelson | AFP | Getty Images

Alphabet may have disclosed numbers for YouTube and Google Cloud for the first time, but the excitement is leveling as Wall Street says results might not be enough to stave off broader deceleration.

The reactions come after Google-owned Alphabet on Monday reported $46.1 billion in revenue for the fourth quarter, falling short of the $46.9 billion analysts had predicted. YouTube ads generated $15.15 billion in revenue in fiscal 2019, compared with $11.16 billion in 2018. Google’s cloud business generated $8.92 billion in revenue in fiscal 2019, compared with $5.84 billion in 2018.

Following the results, the company’s shares dipped nearly 5% before Tuesday’s opening bell.

Several analysts are weighing in with their reactions, saying that the numbers fell either in line or below their expectations and that, at its current state, YouTube and Cloud won’t be enough to offset the slowing growth of its companywide slowing of ad growth. They are also requesting the company offer more meaningful metrics that will show whether it can turn around the trend.

Meaningful metrics

While the new disclosures made analysts happy they were finally getting what they’ve been asking for for years, some said they didn’t get some key points stakeholders need. For example, Alphabet CFO Ruth Porat said on the company’s earnings call Monday that the majority of YouTube’s ad revenue goes back to the creators, but she declined to give any specifics. That caused analysts to question YouTube’s profitability.

In a note titled “Transparency Not Necessarily Tranquility,” Evercore ISI chief financial officer Kevin Rippey wrote that the transparency won’t affect growth outlook, adding it needed profitability metrics for margin trajectory.

“Certainly appreciate the transparency trend, but key questions remain open,” Rippey wrote. “To the extent investors are really looking for visibility for [operating income] growth, we’re probably not much closer to understanding where margins trough without detail on segment profitability.”

“Management wouldn’t quantify, leaving investors without much certainty for near-term reaccelerating,” he added.

Jake Dollarhide, CEO of Longbow Asset Management, which owns Alphabet stock, told CNBC shareholders always want more disclosures, but tech companies are so beloved by Wall Street that they’re able to get away with reporting minimal figures.

Margins matter particularly for Cloud because it allows investors to measure what Google is spending on sales and marketing as it aims to catch up to industry frontrunners Amazon and Microsoft. For YouTube, it could show whether all the new entrants into streaming video are putting pressure on YouTube margins.

As the company broke out YouTube and Cloud, it also abandoned metrics used in prior reports: cost-per-click and paid clicks. In response, the company pointed to its annual 10-K report but declined to respond to why the metrics are no longer included in quarterly reports.

Cost-per-click on Google properties — which roughly measures the amount Alphabet charges advertisers for each ad served on its websites — declined in recent quarters, showing Google’s pricing power for ads falling.

“The excitement over new disclosures probably put a mask on the weakness — but it was not a good quarter on the top line at all,” Jefferies analyst Brent Thill told Fortune magazine.

Innovate or lose

The metrics that were finally shown fell short of some analysts predictions. YouTube revenue fell below Citi’s expectations and were a whopping 30% below Morgan Stanley expectations.

“Both segments are clearly outpacing core Google advertising revenue growth, but are too small to offset that broader decline,” said Michael J. Olson, senior research analyst for Piper Sandler.

“On one hand, YouTube’s growth runway is arguably longer,” Morgan Stanley analyst Brian Nowak said in a note. “On the other hand, Google must continue to innovate to drive engagement (new content, better targeting, curation) and monetization (new direct response and branded ad products).”

Nowak said Google will need to deliver “faster growth” in its Cloud unit “in order to get credit” for the business.

YouTube ad revenue “undermonetizes,” according to a note from Credit Suisse, which valued each YouTube user at $6.60 per year, versus Facebook’s $24.

Room to grow

Despite the disappointing results, most analysts seem hopeful Google can ramp up growth again, taking into account YouTube’s vast reach and Alphabet CEO Sundar Pichai’s promises.

Pichai said on Monday’s earnings call that there’s “significantly more room” to monetize YouTube, adding “a better commerce experience also is a big opportunity” for Alphabet. “I see incredible opportunity and so many levers that can drive higher users and growth per user or dollars per user,” he said on the call. “The message is there’s a ton of runway.”

Pichai also hinted at a potential option to limit free content on YouTube before making users pay. He gave another example of generating more revenue by offering a stronger connection between YouTube videos and third parties that could result in higher-value actions such as making e-commerce purchases.

Wendy Johansson, global VP and lead at digital media firm Publicis Sapient, told CNBC that e-commerce is a going to be key to Alphabet’s growth, adding that Google has struggled to connect with social network users the way Facebook has with Instagram.

“Frankly, Facebook has done it well with Instagram,” Johansson said. “They need to shift and use that broad reach they have to take advertising back to the users that doesn’t just read, ‘Hey, we took your data and giving it to advertisers.'”

J.P. Morgan analysts said YouTube could also regain growth as “bigger TV dollars begin to shift online.”

The firm also said it was encouraged by Google’s $10 million cloud run-rate for 2020, saying the Cloud unit is gaining momentum in $50 million deals and “building up a significant” revenue backlog.



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