Alphabet's future - Ads and beyond

There is a pretty high chance you are reading this post on the Chrome browser on your Android phone. In case you didn't know, GOOGL - Alphabet Inc owns both of those 2 products. In fact, Alphabet owns a lot of services and software that we all use everyday, with 8 Alphabet's products that have more than 1 billion users: Search, Google Drive, Google Maps, Youtube, Gmail, Chrome, Android and Google Play.

For a internet company whose revenue is mainly based on online digital advertisements, a global pandemic where people are required to mostly stay at home and do pretty much everything online is somewhat of a blessing-in-disguise. Alphabet's Q2 of 2021 reflected this as the company reported incredibly strong growths in revenue and the number of users. There is a clear trend among advertisers to shift their advertising focus online where most customers are and Google is in a optimal position to benefit from this trend.

However, some critics still see Alphabet as a maturing tech firm with little revenue diversification beyond search ads. This is true to some extent but Alphabet has also been investing heavily on other promising bets. Let's dive deeper into how Alphabet can further growth its ads revenue and how potential its bets are.

 

Innovations and the shift in the ads industry allow Alphabet to continue expanding its ads business

Alphabet reported extremely strong Q2 results, beating EPS by $7.99. Its revenue and net income grew by 61.6% and 166.2% YoY respectively. The stock price jumped 3% the day after the earnings call. These strong numbers are largely thanks to the incredible growth across all divisions its digital advertisements in Q2.

Source: Alphabet

Among them, Youtube ads is the one which experienced the largest growth. The number of people who watch Youtube regularly exploded due to the stay-at-home orders imposed by most countries around the world, forcing them to spend most of their time online. Furthermore, earlier this year Youtube launched Youtube Shorts whose purpose is to compete with Tiktok. Right now Youtube Shorts has more than 15 billion views daily and I expect it will play a crucial role in bringing more new creators and users to Youtube.

Another promising source of ads revenue for Alphabet that is rarely talked about is Google Maps ads. Alphabet charges companies to advertise their business on Google Maps platform and to use the Google Maps API. With 1 billion-plus users, Google Maps is a utility-like service (similar to Search) and in our view, is one of the most under-monetized assets that Alphabet owns. Google Maps also acts as a gateway to other Alphabet businesses, such Google Hotels, Google Flights, restaurants and shopping. Morgan Stanley projected that Google Maps will generate $11 billion annually by 2023.

With the Delta variant of Covid-19 is still raging across the U.S. and many other countries, more and more companies will continue to increase their budget for online digital advertisements to reach their customers. As the world largest digital ads provider with tremendous technological innovations, I believe Alphabet will continue its strong growth the upcoming years. Analysts forecast that revenue and earnings of Alphabet will grow 22.4% and 24.9% respectively on average each year over the next 3 years.

Source: Analyst Estimates

Alphabet's biggest bets: Google Cloud and Waymo

The cloud computing market is an extremely profitable and fast-growing market which is expected to keep growing at 18% CAGR until 2025. Google Cloud is currently in the 3rd place with 10% of market share, behind AWS (32% market share) and Azure (20% market share). However, Google Cloud is catching up quickly with a massive revenue boost in Q2 of 2021

Source: Alphabet

In general, Google Cloud offers better pricing than its competitors. IAs more companies continue to use machine learning and big data to improve their operations, Google Cloud will definitely stand out thanks to its world-class product offerings (Big Query for fast querying of big datasets and Tensorflow for building large-scale machine learning models). Not only that, Alphabet also offers its in-house Tensor Processing Units chip, which delivers an order of magnitude better-optimized performance per watt for machine learning, to Google Cloud's customers. Alphabet's executives have repeatedly stated the company's focus and commitment to scale Google Cloud, which explains the incredible growth Google Cloud has been enjoying in recent years.

Another notable bet of Alphabet is Waymo, its autonomous driving technology subsidiary. Started as Google's self-driving project, Waymo has grown into a $30-billion business according to the latest funding round. Regarded by most as the leader in the self-driving industry's technology, Waymo's technology has almost reached Level 4 autonomy, meaning no human driver is needed in Waymo's defined operational conditions. As a comparison, Tesla's autonomous driving system is not even at Level 3 yet.

However, to advance the self-driving technology to Level 5, which means no human driver is needed in any condition, and to make the technology available to the mass is still a long way to go. Right now Waymo only offers its service in Arizona and has partnership deals with a handful of automobile companies such as Fiat Chrysler, Volvo and Nissan. Nonetheless, given the huge application of the self-driving technology and the fact that Waymo is the industry leader, I believe Waymo has potentials to become a Alphabet's mega subsidiary.