Alphabet Q3 Revenue up 24% | Hacker News Reader

Alphabet Q3 Revenue up 24%

cnbc.com

89 pointsMarkMc58 comments

Given its size, Google's growth rate is incredible. What's more, they still have a long way to optimise ads. I was recently shown a YouTube ad for cat food, but Google should know I don't have a cat because it has my entire photo stream for the last 3 years.

They could probably improve targeting of individual ads.

However, the bigger hammer of pushing organic content down is pretty much done. Just about any query that seems like it can be monetized results in more ads than content above the fold.

I would guess that sometime soon their ad revenue growth slows down to match internet growth.

I'm a shareholder in Google so you won't be surprised to hear that I'm more optimistic about Google's future prospects.

As an aside, here's what Fortune magazine said about the Coca Cola Company in 1938:

“Several times every year a weighty and serious investor looks long and with profound respect at Coca-Cola’s record, but comes regretfully to the conclusion that he is looking too late. The specters of saturation and competition rise before him.”

From http://www.mdaniels.com/coca-cola-on-market-saturation-and-c...

You're right in that I may be missing something, but my reasoning was this:

- Revenue continues to be mostly ad driven

- They have been able to maintain growth that exceeds internet growth by having big levers...like showing more ads above the fold than they used to.

- I don't see any more big levers, just smaller ones, and "not free" ones. You can see their traffic acquisition cost is up.

The part you're missing is that the Internet is still growing, and so having inserted themselves as the gateway to the Internet, they can maintain large growth rates simply riding along Internet growth without increasing their share of it.

The Internet may have tapped out in terms of number of people online (although even this I doubt; last I heard it was something like 3B Internet users, out of 7B total humans), but it still has a long way to go in terms of usage. Think of all the senior citizens who still watch the evening news, read the newspaper, go shopping in a physical store, decide where to eat by walking around, call up contractors by looking in the yellow pages, and decide which financial products to use based on which sales rep cold-calls them. My mom still does all of the above. As a Millenial, all of those activities have moved online for me.

I used to work for Google Search, and my position allowed me to have access to their query metrics. We'd listen to the earnings calls and laugh at the Wall Street analysts whose questions indicated that they assumed that # of queries was static, something we knew wasn't true.

>The part you're missing is that the Internet is still growing

Uh, no. I specifically called out the relationship to internet growth. Their growth has been exceeding it, I predicted it would slow down to match.

"I would guess that sometime soon their ad revenue growth slows down to match internet growth."

I'm saying that 24% yearly growth is quite achievable just on the strength of Internet growth. It's likely that they already have slowed down to match Internet growth (I would bet that this happened around 2013, which was when I observed saturation in the percentage of above-the-fold commercial results that are ads), but that this rate is still high enough that Wall Street's estimates are low.

So you're saying that John Q will search 30% more next year and Google will own (with FB) say 85% of the ad market. How long will that last before enemies succeed to get the state involved?

Goog is valued at $700 BILLION right now. Will it be $1.5 Trillion in 5-10 years?

Or rather, John Q Millenial is already using Google for most things and will search 5% more, but his dad John Q Boomer will finally be convinced to save $50/month by cutting his TV subscription and using the Internet only and will search 45% more. Or if that doesn't happen, John Q Boomer dies off and his place, as a consumer, is taken by John Q Student who already uses Google for 100% of his consumption.

That's what happens when you get a technological revolution - the new means of production completely replaces the old. Imagine you were born into a wealthy Virginia plantation in 1830. Your mental model of the world is that cotton is king, wealth comes from working and owning the land, slavery is just how things are done, traveling beyond your plantation is prohibitive in time and cost, and your family is part of the landed aristocracy and secure in its social position. If you live to the ripe old age of 90 and die in 1920, you will have seen cotton become just another commodity, inconceivable wealth generated by newfangled machines that you could not have imagined, over half the population move to tenements in cities, people crossing the Atlantic in a matter of days, slavery outlawed, and your plantation burned and its title stripped from you and divided amongst your slaves.

And yeah, if the state survives, it will absolutely get involved. I would bet even money that the concept of a nation state fractures and starts to disintegrate within 20 years, though. The idea of a nation-state as it currently exists is a construct of the Industrial Revolution: the new technologies being developed benefitted from vastly increased scale and social organization, and so those populations that organized themselves as nations were able to defeat those that did not in battle. (Note that in the example above, the "state" was Virginia in 1830 but the United States in 1920; the U.S. of 1830 was organized as a loose confederation of states while that of 1920 was organized as a nation-state with a strong central government, and it took the "Union" defeating the "Confederacy" to bring that about.) I don't know what sort of social organization the information age will demand, whether it'll be city-states in a trade confederation or corporate feudalism where you pledge loyalty for your employer in exchange for protection, but it'll likely not be the nation state as we currently know it.

Thanks for sharing your view, I find it very illuminating. The notion of a nation-state must now adapt to be both regional and digital. We still need voting for local things, I want our =water supply to be clean, etc. Having people who are able to vote through the internet would theoretically strongly increase democracy-in-participation but it also brings in a lot of strong questions of how to do regional decisions when some people are casting their ballots remotely. If everyone became an absentee voter, the whole structure for regional decision making comes into question. Thanks for writing your write-up. I don't think I ever heard of an instance when a plantation's land was divided amongst the slaves that worked it, but that would be a form of social justice I can get behind.

Yeah but the state, union of states, confederations or whatever will exist in a form or another. Antitrust in pretty much hard coded into every country's legal doctrine.

Here is something that could reasonably occur in 1 year:

- Number of people connected to internet grows by 7%

- Average income of existing users grows by 2%

- Amount of time on internet spent by average user grows 7%

- Number of ads served to an average user per hour of internet time grows 2%

- Effectiveness of an average Google ad grows 9%

Total growth in Google revenue: 30%

Also keep in mind that most of Google's costs do not need to rise in line with revenue - it wouldn't take twice as many employees to serve twice as many ads. Including dividends, I would put the chance of a $1.5 trillion valuation in 10 years at 60%

How much $$ do they still make from "Coca Cola" ?

https://en.wikipedia.org/wiki/List_of_Coca-Cola_brands

What is Google gonna buy, especially now that EU antitrust is on their tail?

Does anybody in your family have a cat?

I recently visited my brother and he was talking about crowdfunding a project of his..guess what? YouTube showed me ads for crowdfunding platforms later that day, probably because I was logged into his wifi.

It sure feels a bit creepy sometimes!

Yeah, I've been in a meeting with nobody using the internet and our phones just merely sitting our pockets. 3 hours later I saw ads relevant to the conversation in the meeting, for which, again, I had not googled or used internet for, on Instagram.

What was in the title/description of the meeting in your calendar app?

I'm guessing at least one person in the room was on android and syncing with gcal.

Wasn't even a trace of that meeting virtually, it was a spontaneous over-the-coffee idea. Subject was improv acting, which is something neither of the participants have ever even googled.

Do you think this may be a bit of Baader-Meinhof going on?

Probably. A couple of non technical friends and I were talking about Bitcoin one evening, they had never heard of it.

A few days later one of these friends calls me asking how is it possible that he's seeing Bitcoin ads everywhere after we talked. I also thought that's Baader-Meinhof happening, but it doesn't make ads any less creepy.

Ha, I had a couple of experiences alike also. But then if you look at the big picture, it makes sense. You're a solid target for Bitcoin ads, you're in the same location with 3 other people, likely same demographics, interests, social status etc. and they become a target too?

This is all suppositions of course, I have no idea how it works. But I've tried this experiment with my gf once:

We both opened Instagram and started talking about a product class that we never saw ads for there, say like shampoos. We even mentioned a few brands and then waited for the ads to hit us. They never did.

EDIT We use iPhones

> you're in the same location with 3 other people, likely same demographics, interests, social status etc. and they become a target too

Nice, let's call this technique "advertisement by osmosis" :-)

What is Baader-Meinhof? I only know the terrorist group with that name.

The “Baader-Meinhof Phenomenon” is a name that was applied to the frequency illusion [1] before the term “frequency illusion” was coined.

It's a particularly bad case of opaque naming, because even knowing about the terms that make it up gives you no clue what it means (since it doesn't reference the Baader-Meinhof Gang, but instead presumably the experience of the person who coined the term around the time they first encountered the name “Baader-Meinhof Gang”.)

Further shortening to “Baader-Meinhof” (perhaps a result of mistaking the name for being named after the discoverers, which would be less opaque, like the Dunning-Kruger Effect, where familiarity with the work of the researchers in question makes the term less opaque) actually makes the term worse, since then it seems like a direct reference or analogy to the group.

[1] http://web.stanford.edu/~zwicky/LSA07illude.abst.pdf

I know several other people who have noticed this experience in the last 6 months for the first time.

For me, it happened with my Google Now feed and the Netflix show Riverdale (not my cup of tea, but my wife was watching it).

May be the phone's microphone have picked it up.

That was my idea as well.

Well my stepmother has a cat, and I may have been using her WiFi. But I was logged into YouTube as me, and the videos I watch would not be of interest to her so Google could be very confident that they were indeed advertising to me. (By the way, Google also have my location history so they can see that I never visit the pet food ailse at the supermarket).

So I'm inclined to think Google is not optimising their ads.

This episode has made me think Google should have a "Human vs AI" internal competition: Take a specific Google end user, and see whether a Google employee can tweak that user's ads to get a better conversion rate. If so, the employee gets a big bonus and the engineering team get to know where their ad algorithm is lacking.

My cat of 18 years died this summer and at first I thought the advertisers were onto it: I started getting ads everywhere about depression and counseling, but after a while I started seeing cat food/litter ads again. I wonder if they're trying to prompt me to get a new cat though...

Maybe you should get a cat ?

Alphabet is closing in on Apple's financial crown. At the current rate they'd likely surpass Apple in net cash in the next 12 quarters, barring a shareholder payout (which is likely).

Google, the subsidiary, is chasing down $40 billion in annualized operating income ($8.7 billion this quarter). To put that into perspective, that's equal to twice the operating income of Johnson & Johnson (a monster corporation with a $380 billion market cap). It wouldn't be far fetched for Google to reach $55-$60 billion in operating income in three years.

Alphabet now has $100 billion in cash and no meaningful traditional debt. Apple has about ~$160 billion in net cash, a sum that has mostly stopped increasing. Google should stay ahead of Apple in net tangible assets this quarter as well.

Given Alphabet's growth rate (and assuming it slows some), they should get near Apple's general $40x billion net income territory in three years.

By contrast, Microsoft also has an immense amount of cash, at $138 billion (cash or equivalents). However they're carrying $76 billion in long-term debt. Google presently has approximately 5x the net tangible assets of Microsoft.

Totally agree on Google closing in on Apple and App!e is 22 years older.

Apple FY Q3 FCF was actually less than Google FY Q3 FCF by 20%.

Now Apple is off calendar by a quarter but suspect Google will do it again in Q4. Problem for Apple is their results in 2015 were better than their projected FY 2017 while Google has strong growth.

iPhone replacement cycles will continue to slow just like PC sales years ago.

This assumes Apple won’t accelerate earnings, though. I think given the blowout earnings we’ve seen elsewhere in the market this is unlikely especially with Apple looking to raise average unit costs on the iPhone and iPad.

Apple is forecasted in their FY 2017 to be far worse than their 2015. While Google does over 20% growth.

Anything besides ads that actually make them money ? I am honestly curious if they still cannot find a way how to make money with anything else besides ads

$3.4B in "other revenue" (for Google), which includes hardware sales, their cut of app sales on Google Play, enterprise products like GSuite, and Google Cloud. $302M in "other bets" (the non-Google Alphabet companies), largely from GFiber and Nest.

Google - like Apple, Berkshire, and several other companies - suffers from the curse of too much capital. I would love to have a business with $3.4B in revenue - it actually puts you in the Fortune 1000 at around #675, right alongside Urban Outfitters and Citrix and slightly ahead of Diebold, Abercrombie & Fitch, and Warner Music Group. But when your other business is AdWords and makes about $90B a year, it doesn't really move the needle.

That's $3.4B per quarter, or $13.6B annualized run rate, putting it closer to #200 on the Fortune list by revenue.

Compre to Apple’s $6B service revenue, which is quickly on the way to be a fortune 100 company.

Both companies need diversification. I’m with Google with this one long term because I think their bets are more interesting.

I'm always curious why they don't built a business/engineering search tools that are far better than the competition, plus other technological building blocks, something like "a killer way to develop new technologies and businesses" and offer those as a complete package only for invested startups.

They sell a lot of types ads on a broad set of platforms, much like how Toyota "only sells cars". YouTube, Search, Gmail, Play store and their display network are all examples.

But if you want diversification, their cloud services are growing quickly and they seem very committed to growing their hardware revenue.

Ads=Attention

As the world moves into virtual space, nothing is as valuable as attention. Storage and Processing power are commodities.

I would say owning the worlds attention is enough of a business model.

> owning..attention

They don’t own it. They only provide a way for advertisers to make an appeal for it.

Sounds like a quibble but their entire business model can come crashing down in enough people start using adblockers which is already happening organically by word of mouth with little noise.

Ownership would mean they can force your attention on anything they deem fit.

And yet, in spite of ad blockers, they are reporting a 47% increase in paid clicks. Something truly massive is going on here. I'm not convinced that this is sustainable either.

You can say the same thing for many companies. Example, Apple. Most of their money comes from iPhone

What is wrong with that? Most companies operate in a single field of business. Those who diversify sometimes don't do that great as the focus changes a lot.

Ads is a business model and not a product or service. Search is a service. Google generates ads from a variety of services. So not sure what you mean by diversifying?

Plus fastest growing is the business not using an ad based business model.

It is like saying CBS needs to diversify. Well if they only had 1 popular show then a need to diversify.

One thing I am curious about from the finance perspective is - How does the revenue recognition (RevRec) happen in the internet ad business? If company A has committed $200 million in ads over 6 months to Google. How will Google book and recognize this as revenue?

> How does the revenue recognition (RevRec) happen in the internet ad business?

"Revenue from advertising is recognized when the goods or services have been delivered or provided, the amounts we charge are fixed or determinable, we and our advertisers or other customers understand the specific nature and terms of the agreed upon transactions, and collectability is reasonably assured. We recognize as revenues the amounts charged to advertisers each time a user engages with ads that appears next to the search results or content on Google properties or Google Network Members’ properties. For those advertisers using our cost-per-impression pricing, we recognize as revenues the amounts charged to advertisers each time their ads are displayed on Google properties or Google Network Members’ properties."

TL; DR When an ad is clicked on or viewed.

https://www.sec.gov/Archives/edgar/data/1652044/000165204417... Alphabet Inc. Form 10-K FYE 2016

Disclaimer: this is not securities advice. Do not buy or sell securities based on my Internet comments.

I'd be very surprised if it were any different than what's standard, which is to recognize the revenue when the product/service is delivered.

Sure but the problem lies the exact definition of delivered. What does delivery mean here?

Wow, that’s quite a bit, right?

It’s time for people in the valley to team up and create a real competitor to google ad. This has been lasting for too long.

Appnexus is a good competitor to google ads. It provides many of the same features that google ads offers. http://appnexus.com

Good luck

G is for Alphabet! (poking fun at the legacy stock ticker)

I read this in another article:

https://www.cnbc.com/2017/10/26/amazon-alphabet-microsoft-in...

>In a call with CNBC, Alphabet CFO Ruth Porat reiterated the company's theme of "products with AI [artificial intelligence] at their core," but the main function of that AI today seems to be optimizing ad revenue.

Are all the improvements to machine learning being made to just to show us more targeted ads?

Have you used Google Photos yet? The benefit of AI is strongly apparent there.

Yes, at least for now. We are good with more specialized AI yet and those have a much longer ROI. Optimized ads hits now. I guess we can hope that this money pays for the development of the other stuff but.....

Technologies like GPS, space travel, even the internet, were created just to improve military capabilities. Do we care, nowadays?

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