【2024.10】How to view Google's performance? Focus on the fundamental layout and growth points.

In the global search engine field, Google can be said to be dominant, even Microsoft's Bing, with the support of ChatGPT, has not been able to threaten Google's leading position. Google's market cap also exceeded $2 trillion this year, firmly ranking among the top five giants in global market cap.

After the post-market trading on October 29th, Google will release its latest earnings. Every time the company releases its earnings, it may also mean a good trading or investment opportunity. Before that, investors need to understand how to interpret its earnings.

How should we interpret Google's earnings? What are the key points to focus on? Its core may lie in three aspects, including a base business, a growth point, and its shareholder returns.

1. Base Business: Advertising Business

When looking at a company's financial reports, the first thing to pay attention to is the business with the highest revenue share. In Google's revenue composition, advertising revenue accounts for nearly 80% of total revenue, which can be considered as Google's base business. For Google's advertising business, two main points need to be considered.

First, pay attention to the growth of advertising revenue.

The advertising business has a certain cyclical nature. When economic expectations are not good, businesses need to lower costs and increase efficiency, and one of the first areas that may be cut back is advertising spending, putting pressure on the entire advertising industry to grow.

Previously, Google's advertising revenue growth rate has been declining since the peak in Q2 of 2021, especially starting from Q2 of 2022, with the Federal Reserve entering a rate-hiking cycle, declining economic expectations, Google's advertising growth rate has plummeted, showing consecutive negative growth for two quarters starting from Q4 of 2022.

However, by Q2 2023, Google's advertising revenue saw a better-than-expected stop in decline and a year-on-year growth of about 3.3%. In the latest 2024 Q2 performance, the advertising revenue growth rate reached 11.1% year-on-year, maintaining double-digit growth for three consecutive quarters. In future performances, we still need to continue monitoring whether the growth rate of its advertising revenue can sustain the higher growth rate.

Secondly, pay attention to the changes in Google Search's market share under the impact of ChatGPT. In Google's advertising business, the vast majority of revenue comes from Google Search ads. This is the foundation of Google's survival and development.

In the statistics from Statcounter, we can see that from January 2023 to September 2024, with the support of ChatGPT, Microsoft's Bing market share increased slightly by a percentage point. Google's market share also showed a slight decrease but still remains above 90%, maintaining a dominant position. Its moat and competitiveness may not have been significantly impacted. Going forward, we can continue to observe whether Google's market share can remain stable.

2. Growth Point: Google Cloud

If the advertising business is Google's bread and butter, then the cloud business is Google's core growth point. By Q2 2024, Google Cloud accounted for just over 10% of total revenue but was one of the main growth engines for the company. For Google Cloud business, two points can also be observed.

First, see if Google Cloud can maintain high growth. Currently, Google Cloud ranks third in the cloud computing service industry, although its market size is far behind Amazon and Microsoft, but its cloud business growth rate remains the highest among the three. However, with the overall slowdown in the cloud service market growth, Google Cloud business growth rate has also significantly slowed down.

In the first two quarters of 2023, the growth rate was stable at around 28%, dropping abruptly to less than 23% in the 2023 Q3 fiscal quarter. However, from 2023 Q4 to 2024 Q2, Google Cloud business growth rate stabilized and rebounded back above 28%.

For the revenue growth expectations of Google Cloud, we can pay attention to a forward-looking indicator, which is the revenue backlog to be disclosed in the performance, mainly the amount of confirmed revenue from signed customer orders that have not been executed, which can be seen as the reserve of Google Cloud business.

We see that the contract revenue of Google Cloud in 2024Q2 is approximately $78.8 billion, rebounding strongly after a slight decline in the first quarter of 2024, and reaching a historical high. This may be good news for the growth expectations of Google Cloud. Going forward, we can continue to observe whether the contract revenue of Google Cloud can maintain an overall growth trend.

Secondly, look at the profit margin of Google Cloud. In the cloud computing industry, there is a significant economies of scale to a certain extent. Only after reaching a certain scale is there a possibility of profitability. The more customers use the products developed with the same amount of money, the higher the profit margin may be. Although Google Cloud's revenue growth rate far exceeds Amazon and Microsoft, due to the smallest revenue scale, its profitability has always been the weakest.

For a long time, Google Cloud has been in a continuous loss-making state, dragging down its overall profitability. The good news is that the overall loss has tended to narrow until Q1 2023, when Google Cloud's revenue scale reached a critical point, along with cost optimization from layoffs, Google Cloud finally achieved its first profitable quarter in history and continued to contribute positive profits from Q2 2023 to Q2 2024 fiscal quarters. Starting from the Q4 2023 fiscal quarter, Google Cloud's operating margin has remained above 9%.

For the future fiscal quarters, we need to observe whether Google Cloud's revenue growth can continue its rebound trend and whether it can push the operating profit margin to continue to rise under the effect of economies of scale. If Google Cloud's profit margin can continue to improve, it may also boost Google's overall profitability to a higher level.

3. Shareholder return: Share buyback situation

For technology giants like Google, both revenue and profit volumes are already very large, and it may be difficult to replicate the rapid growth miracle of the early stages. The future normality may be moderate to slow growth.

In terms of stock price trends, the long-term driving forces may include two aspects: one is revenue growth, and the other is shareholder return. If growth is insufficient, shareholder returns may need to make up for it. The core of shareholder returns mainly includes share buybacks and dividends. Google is mainly focused on buybacks.

Through share buybacks, on the one hand, the number of outstanding shares can be reduced, thereby increasing earnings per share. On the other hand, it can inject additional funds and liquidity into the market, and even lower the company's net assets to increase the return on net assets, all of which can have a very positive impact on stock prices.

In recent quarters, Google's buyback amount has remained at around $15 billion, second only to apple among all technology giants. Its return on net assets in recent years has also remained at a relatively high level of around 20%. For future performance, we can continue to focus on Google's buyback situation. If it can continue high buybacks, it may inject more confidence into the market.

Seeing this, you may have some new insights on how to read Google's performance. It is worth noting that every time a star company releases its earnings, it may represent a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors feel uncertain about the bullish or bearish direction of a company's performance, but the stock price may experience significant upward or downward volatility after the performance announcement, investors may consider capturing potential opportunities by trading the volatility of its stock price, considering employing a straddle strategy by purchasing both call and put options simultaneously.

Finally, to summarize,

The advertising business is Google's foundation, with revenue returning to growth in the last two quarters. We need to pay attention to the sustainability of its growth.

Google search is the foundation of the advertising business. We need to focus on whether its market share can continue to remain high.

Google Cloud is an important growth driver for Google, maintaining a leading growth rate among giants. We need to focus on contract revenue as a forward-looking indicator of revenue growth.

Google Cloud's operating margin is relatively low, and we need to monitor the improvement of its profit margin.

Against the backdrop of reduced growth expectations for Google, its substantial share buyback has a positive impact on the stock price. We can pay attention to the sustainability of its high buyback.

Every time a company releases its earnings, it may bring potential trading opportunities. Investors can consider suitable types of trades based on their individual risk tolerance.