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Alphabet Counting on Cloud and YouTube

Posted on Tuesday, Apr 26th 2016

After delivering stellar results a quarter ago, Alphabet (Nasdaq: GOOG), formerly known as Google, reported dismal results last week. The market was so disappointed with its performance, that its stock reported the biggest decline in the past three years. But given the company’s continued improvements, this is probably just a tiny blip.

Alphabet’s Financials

Alphabet’s first quarter revenues grew 17% over the year to $20.26 billion, falling short of the Street’s forecast of $20.37 billion. EPS of $7.50 was also short of the market’s projections of $8.00 per share. The losses were driven by a stronger dollar, higher traffic acquisition costs for Alphabet’s Google segment and a substantial operating loss of $802 million on the Other Bets segment.

By segment, revenues from the Google segment grew 17% to $20.09 billion and revenues from Alphabet’s Other Bets more than doubled to $166 million. Within Google segment, search revenues from Google Website grew 20% to $14.33 billion while Google Network Member’s website revenues grew 3% to $3.69 billion and other revenues grew 24% to $2.07 billion.

Among operating metrics, number of “paid clicks” grew 29% over the year but fell 3% sequentially. Paid clicks on Google websites grew 38% over the year and paid clicks on member’s websites grew 2% over the year. Aggregate cost per click fell 9% which included a 12% drop on Google’s own sites and an 8% drop on member’s websites. Total traffic acquisition cost grew 13% to $3,788.

During the quarter, Alphabet repurchased 3.2 million shares of Alphabet Class C capital stock for $2.3 billion.

Alphabet’s Cloud Focus

According to Synergy Research, Amazon, Microsoft, IBM, and Alphabet together account for 54% of the cloud suppliers market. But Alphabet has the lowest share among the four. Where Amazon holds 29% of the market followed by Microsoft’s 12%, IBM accounts for 7% market share followed by Alphabet’s comparatively modest 6% market share. But Alphabet is looking to change that.

In December 2015, Alphabet reorganized its management and unified the cloud businesses under one leader, VMware founder Diane Greene. The move is expected to help Alphabet innovate faster and deliver better products to its customers. Alphabet believes that the move is already delivering results. Organizations are able to see the benefit of integrating Google Cloud Platform with their suite of business applications, all of which are already integrated with their machine learning services. Alphabet believes that its investments in machine learning and artificial intelligence will help it acquire a bigger share of the cloud market. During the quarter, Alphabet introduced Cloud Machine Learning, which provides modern machine learning services with pre-trained models such as Cloud Vision API and Cloud Speech API to its cloud offering. Alphabet is convinced that its machine-learning capabilities will help organizations really understand and act better on their data. In fact, it claims: “bringing our machine learning APIs over time through cloud to our enterprise customers is going be a huge source of differentiation for us”.

Alphabet Continues to Bet on YouTube

Meanwhile, Alphabet remains focused on YouTube. After launching YouTube Red, its ad-free subscription based offering, YouTube is now counting on original content to boost revenues. It has already got six shows so far and plans to end with 15 to 20 original offerings this year.

Market rumors suggest that the company is also building a new YouTube app as part of a new livestreaming app. YouTube Connect will allow customers to begin streaming from their mobile phone and will include other social features such as the ability to share, chat, and tag the videos. The app will help Alphabet compete with the likes of Twitter’s Periscope and Facebook Live. It will be available on both iOS and Android devices. Earlier this month, YouTube also announced the launch of a spatial audio for on-demand YouTube videos. Alphabet claims that the experience will be similar to watching a concert live as it will provide the viewers with an immersive experience.

Alphabet’s stock is currently trading at $723.15 with a market capitalization of $496.65 billion.  It touched a record high of $789.87 in February this year. In July last year, its stock was trading at 52-week low values of $515.18.

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