Instant Reaction: Alphabet Sales Beat on Google Search Advertising
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Alphabet, the parent company of Google. The company reported first quarter revenue and profit that exceeded analysts' expectations. It was buoyed by continued strength in its search advertising business. And that's exactly where we want to go now. We've got back with us Mark Douglas. He's president and CEO of Mountain, the company of software that helps companies target advertising on smart TVs. He understands the ad spend market. He joins us from Miami. Mark, good to talk with you again. Thank you.

Does this surprise you given the trends that you're seeing when it comes to advertising? Not given the trends. I think the trends for I want to talk more specifically about Google. Yeah, I think we started the you know, we started the year and I think everyone literally everyone was very optimistic about the economy.

um you know q1 and google's reporting on those results i think they did very well i think there were concerns and continue to be concerns about whether ai on their platform meaning in your search results is going to some way negatively impact their search business but i think as an investor even there just provide some comment on that look i'd rather have google competing with themselves than allowing other people to compete with

them. So I think even that's a positive if in the future it does have some negative impact. Well, you know, it's funny that you say that, you know, and I'm looking at our write through by our Davy Alba, but this whole idea that, you know,

alphabet Google has to show, right, that it still has momentum in search advertising and cloud, but at the same time show that it's as it makes incredible investments in the AI build out as the world kind of shifts in that direction, that it's also there as well. It's really tricky. And this is what our Mandeep Singh said. You know, this is a company that's got seven apps with over, I think, two billion monthly active users. You know,

It's bread and butter is still Google, right? And it's search business. But as people move to Chachi BT or Gemini, like that's a tough transition. It's got to juggle a lot.

Yeah. And like I said, I think if I'm an investor in Google, I always say to my company, better we compete with ourselves than we allow someone else to do it. Right. So if I'm an investor, what I'm looking for is that the management team is awake, they're alert and they're ready to compete. And I think Google's showing that and what they're doing with Gemini and they're showing that they can still navigate search. Also with a company like

With that scale, you mentioned the tremendous scale they have. Honestly, you can always squeeze out more revenue and as a result, more earnings. So I think it also shows that they can manage the business in order to find those extra dollars if they need to while they might be challenged in other areas. Is this the classic innovator's dilemma, though? Google's core search business is so profitable and it's so entrenched and it's so ingrained.

in pretty much almost every country in the world, we have to say almost, that there is a concern that it doesn't want to cannibalize that with investment in Gemini. Right.

Yeah, that's what you don't want to see. Right. You want them to be like, like you almost want it to be two separate companies and they just go at it and may the best, you know, part of Google win. The other thing. As long as Google wins. That's the point, right? Like you said, you like to be competing with yourself. Forgive me. Go ahead. Exactly.

Yeah, no, exactly. The other thing to remember, you know, mobile was a big threat to Google. Yeah, like Google was all desktop and you have your browser out. That's still, you know, obviously a huge part of their business. And people were very worried about whether, you know, people were going to search on mobile. And if they did, whether they were going to respond to the ad. So, I mean, it's not the first time Google has been challenged by new technologies. And they, you know, honestly, kudos to them because, again,

I expected Gemini to possibly cause some problems in Q1 in terms of their revenue, and obviously it hasn't. Hey, one last question. On the upcoming call with analysts, what would you be asking? What do you want to hear?

I would be all about Gemini and how AI results at the top of the search page, which essentially have replaced the paid, you know, the click ads, the paid ads at the top of the search page for a lot of searches.

I would want to ask every possible question I can on data related to how that's impacting their search revenue, their search results, responses to the searches, everything. And if I'm an analyst, try to model that out.

All right. We're talking, of course, with Mark Douglas, president and CEO of Mountain. We want to bring into the conversation Mandeep Singh. He is senior tech industry analyst at Bloomberg Intelligence. Just coming in the studio, it's a little crazy, so he hasn't heard everything that Mark had to say. But Mark said he's curious about Gemini, something he's going to be looking at on the call. Mandeep,

I've been quoting you. You told us what to do, Mandeep, and you were right. I've been quoting you nonstop because you said it's all about search. So walk us through what they got in and how it looks for you because investors like it. Yeah, I mean, the Google services revenue was a slight beat, but what was really impressive was the margin beat on the Google services. And a lot of it is because everyone thought because they are adding AI overviews, that's going to hurt the margins of search.

Oh, it didn't happen. Why didn't that happen? Because you have to explain this from the perspective of a Google user, like the experience. If we get the answer with the AI overview, we're not looking at ads. We're not clicking on things. Yeah. Why doesn't it hurt? Because they have so many different types of queries on Google search that some of those queries, they are able to monetize it just through...

ads on AI overviews. Remember, Google never went away from ads, even though they integrated LLX. Ads has always been a core part of the Google.com offering, even with the AI overviews. And they somehow weave the ads in a way where they're able to charge for those ads. That's what makes them so special. I never look at an ad on

Like, what is wrong? I don't know. When I look at an AI overview, all I'm looking at is the answer. It depends on whether it's, you know, an informational query versus an e-commerce query or a travel query or an auto query. The page change is so dynamic that they are able to weave in the right ads with the right kind of target. What about with the Gemini app?

And like the app experience, are they able to make money doing that yet? No, no. Does that matter? I mean, you have to remember, Google does five trillion searches a year. Five trillion. So, you know, even if they monetize 20 to 25 percent, which is the case, 75 percent of the queries are not monetized.

Imagine how much power they have in terms of the targeting they have with the ads, as well as the number of queries. Even if Chad GPT is taking some volume, five trillion is a lot. Mark, I want to bring you back in as we've got Mandeep Singh, brilliant part of our Bloomberg Intelligence team. Mark Douglas, President and Chief Executive Officer of Mountain. Really great perspective in terms of advertising within this world. But you mentioned something interesting.

about Gemini that you want to hear on the call. Just lay it out again for Mandeep so that we can kind of dig into that with him. Yeah, I mean, I think it's similar comments, which is the Google as a company, I think what's most important to see is that they let the different parts of the company compete. So Gemini competes with search results because they're

If they don't compete with themselves, then OpenAI and others are going to do the competition for them. And so I think it's important that they let them compete. It appears they are. And I also agree with the other comment that he just had in terms of scale of their business.

is like, you know, you can increase search results, you know, paid search results, one half of 1% and B. They have a lot of levers to pull. And I think they're doing a good job pulling them to be able to navigate this climate right now.

And the point about Gemini, not only does it like there's a competitive aspect, but also you learn so much more about the user. Imagine they are on Gmail, Maps, Search. Now you've got one more app where you have your user, you're learning about their type of queries. How good their ad targeting becomes suddenly because they...

are interfacing through Gemini now. So there's one more surface that you are adding and it complements their ad targeting. Mark brings up this concept of, you know, great to compete with yourself. And so essentially, that's kind of what Alphabet's doing, right? With Google search and then Gemini. Yeah.

But is it a guarantee that everybody who's been using Google is just going to easily just kind of segue into Gemini? Can we assume that that will happen? I mean, Google is still the verb, and I don't think it's changing anytime soon. Yes, you can say chat GPT for certain informational queries, and for certain queries, chat GPT does a great job.

But if you're thinking about the Google ecosystem, all the apps that you are used to using on the consumer side on a day-to-day basis, it's hard to take yourself out completely from the Google ecosystem. You'll still be using Gmail, Apps, YouTube, even if you use ChatGPT. I mean, a lot of times, ChatGPT shows you a search result,

And then you go to Maps to search for, you know, the exact address that ChatGPT is showing. Right. Hey, Mandeep, Alphabet shares up 4% in the after hours. Meta Platform's up 2.3%. Amazon shares are higher by 1%. All happening because of what we heard from Alphabet. Is this just a huge sigh of relief when it comes to mega cap tech?

I mean, is everything okay? Are we out of the woods? I'll wait for the call because remember liberation day was April 2nd. Yeah. This is through March 31st. We don't even,

even know what the impact of tariffs was. I mean, all that happened at the beginning of 2Q. So we may be, I think, too far-fetched in thinking, you know, we're out of the woods, but it's a good print. It's a good point. It's a good point. Mark, come on back in. I'm curious if you have a question for Mandeep Singh. Like, you know, you follow this market, you follow this company. I'm just curious.

Yeah, I actually want to take the conversation slightly to another part of Google's business. One of the things, you know, I'm still very much an active engineer. And one of the things I'm seeing is Google be very aggressive on capturing market share in the Google Cloud business.

And that's not something I think many people are talking about today, but that's potentially setting up from some really good results in that part of the business in the future. So I'm curious, Vandeep, if you have any thoughts on that part of Google. VANDEEP CHOPRA: Yeah, I mean, it goes to the point about them having this huge infrastructure that powers their family of apps, also powers the cloud business.

And 30% growth on a $50 billion run rate is very impressive. The problem for Google is it doesn't generate the same kind of profitability that search does. And that's why investors don't care that much. But look, I think they could even grow faster on the cloud side. They're probably somewhat supply constrained that everyone is in terms of AI infrastructure. So that cloud business could continue to compound at 25, 30% clip for a while.

We've been talking about how the stock has really popped in the after hours. It's off some of its highest levels in the aftermarket, Mandeep, but still up about 4%. But that point that you said, this is through March 31st, not before kind of the stuff hit the fan, right? And has really kind of changed the environment.

Is that a very, very important caveat? Because these are the kind of companies, right, in the next week or so, these big mega cap tech companies that were like, what do they have to say in this environment? So I'm just curious if we have to be kind of smart as we go through their results. And not to take both sides, but on the top line, I think search beat wasn't that impressive as it was the last time around. It's more the margin expansion because everyone thought AI overviews would hurt margins. So clearly they have executed very well on that.

The buyback and the dividend is good capital allocation. But in the end, you know, search beat wasn't that impressive, you know, for a 5% increase in the stock. Would a 5% boost to its dividend happen if Alphabet were concerned about the environment in the current quarter and for the remainder of the year, Mandeep? I mean, clearly... Like, is that an indication that things are pretty good if we look at that as a potential sign of guidance? Yes.

It's more the fact that they trade at a much lower multiple than their peers, Microsoft and Amazon. So from that perspective, you could say management feels their stock is cheap. But look, they're making this acquisition of Wiz where they are paying $33 billion. It's a lot of money. It's going to close next year, so it's not going to affect the free cash flow this year. But if they spend $75 to $80 billion in data center CapEx and then $33 billion in this acquisition...

Then, you know, you're not able to fund all these buybacks and dividends with your free cash flow anymore. I wonder if both of you, I'm looking at our MarketsLive blog and our macro strategist, one of them writing that the headline is a beat, but it was driven by advertising where revenue rose 8.5% from a year earlier. That's not going to help the rest of the Magnificent Seven very much. Mark, do you have any thoughts on that? Because we are getting ready to have all of these names and numbers and results published

coming at us. And we know investors love to know what the Mag7 are doing. Well, I think it indicates that Q1 was a healthy environment for Google and likely for other companies, especially in tech. I think the question on Q2, very valid question for all investors. But I think for Q1,

I think maybe people are mixing these quarters together in their mind. Q1, solid for Google, I'm guessing is probably, educated guess, solid for these other big tech stocks also. All right, Mark, we're going to leave it there with you. Thank you so much. So good to check in with you once again. Mark Douglas, president and CEO of Mountain, joining us from Miami.

Your thoughts on that, Mandeep, in terms of what's to come. I mean, there's Alphabet and how they make money, and then there's the rest. Is there any assumptions we can make or not really? They're all kind of different. Yeah, I think after the call, we'll have a better sense of how they are viewing the environment. I mean, the whole thing about Chinese advertisers pulling back. Yeah. And

And Alphabet in general has a broader swath of advertisers on their platform. When you think about Meta, even though it's a duopoly, and Meta probably is more skewed towards, I would say, retail.

And it doesn't have as much autos exposure as Alphabet has. So there is some nuance with regards to their advertiser base. I would say Alphabet is more diversified. So if Chinese advertisers are pulling, that will hurt Meta more, for sure. Alphabet doesn't give guidance. So what do investors look for on the call to understand the current climate? CFO commentary? I mean, is there anything there that could move the needle?

I think whatever they say around ChatGPT and LLMs and just overall color around competition, because this is the first time everyone cares about comments related to search. I mean, up until two quarters back, it was like, okay, Google is a monopoly. Everyone knows that.

ad pricing may go up and down depending on the cyclicality of the economy. But now the competitive threat is real. But that's the competitive threat with AI and LLMs. What about just the idea that if...

It's an economy where there's uncertainty. Marketers pull back from advertising. That would hit this company very hard. Yeah, but I think what they showed in the print is ad pricing actually went up. For the first quarter. For the first quarter. This is not the second quarter. It's not going to, again, if you think about online ads, Google is the last place where advertisers will pull back because it's the highest ROI ad spend.

You get you actually you pay for what you get, essentially. Yeah. You're not buying. If you're looking for customers online, Google is still the best place because it's the most effective. Remember, they collect data from eight apps that you're interfacing with. And that's why the ad is so targeted.

Meta also has four apps, but then Google probably has more data about you in terms of targeting you. That's why they're so effective. - Right, really specific data, right? Of exactly what you are doing, Tim Stenevik, on any given moment. - Yeah, I know. That's why I don't understand why they keep showing me cars. - You should see the searches. - But I don't know why they keep showing me cars. I'm not buying cars.

No, it's really fascinating. Mandeep, thank you. As always, always, Mandeep Singh, of course, Senior Tech Industry Analyst with our Bloomberg Intelligence team. Shares of Alphabet folks up about 3.9% in the aftermarket. Definitely off its best levels of the day. Sales beat estimates on Google Search Advertising. There are presentations.

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