Advertising revenue makes Google’s profits bubble up

Mountain View, New York The online boom during the corona pandemic and bubbling advertising revenues gave Google a strong tailwind in the final quarter. Sales jumped by a third to $75.3 billion, Google parent company Alphabet announced on Tuesday evening. Analysts had expected a good 72 billion dollars.

The figures were well received on Wall Street: The shares shot up at times by around eight percent in after-hours trading. Competitor titles — including Meta, formerly Facebook, Twitter, and Snap — also picked up steam as a result.

“Thanks to our extensive investments in artificial intelligence, people and companies are having extraordinary experiences with our most important products,” said CEO Sundar Pichai. In the fourth quarter, the advertising and cloud business grew strongly. The company’s own smartphones, called pixels, also set a sales record, “despite supply bottlenecks,” says Pichai.

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Strong advertising business

Google’s core business developed strongly: advertising revenue increased by a third to $61.2 billion. In the third quarter, they had increased even more, by 41 percent.

Among other things, Google is benefiting from the fact that many people are spending more time on the Internet and shopping there during the pandemic. No other company in the world sells as many ads on the internet as Google. The group also benefits from the fact that many people work in the office and from home because of the pandemic.

Some observers attribute the slower increase in the final quarter to the intensified competition. Corporations like Amazon and ByteDance with its video service TikTok are also trying to steal more advertising revenue from Google during the corona pandemic. The main rival in the advertising market, Meta, announces its results on Wednesday.

Observers assume that the competition will intensify in the coming years. The advertising business still dominates the Google figures, wrote Joanna O’Connell from the US analysis company Forrester. “However, it is not clear whether its growth is sustainable. The Management Board did not make a clear statement as to whether it expects continued performance of this magnitude.”

The video platform YouTube in particular delivered strong revenue again in 2021 and is now viewed 15 billion times a day. Google wants to curb TikTok’s success with its own short video platform, called YouTube Shorts.

>> Read here: Chrome dominance: German media call for competition measures against Google

During the corona pandemic, Google entered into a partnership with the Canadian provider Shopify, which is considered a kind of “anti-Amazon”. Thanks to Shopify, small and medium-sized companies can set up their own online shop in just a few clicks.

Losses in cloud business

While the core advertising business made solid profits, the other two large sectors in the Google empire made losses in 2021: the cloud business and the so-called “other bets”. Google wants to expand these areas due to investor pressure, among other things, to diversify the business model more.

In the cloud business, Alphabet CFO Ruth Porat referred to the strong growth in the analyst call: Sales rose by 45 percent in the final quarter to $5.5 billion. The bottom line, however, was a loss of 890 million dollars – mainly due to expensive investments.

“The cloud business scales well and margins in the cloud space are improving,” praised Carolyn Bell of Asset Manager Aegon. Alphabet is “one of the most attractive stocks on the US market.” Google is now the third largest cloud provider behind Amazon and Microsoft. Competitors also benefited from the upturn in data business in 2021.

Things went badly in the final quarter in the third business area, “other bets”, which includes innovative business areas such as self-driving cars and delivery drones.

While sales in the cloud area increased and losses shrank, the picture is different there: Sales from “other bets” fell to $181 million in the final quarter – while losses rose to $1.4 billion.

Political threats

In the analyst call, there was comparatively little mention of an external threat to Google’s position: the complaints and criticism from politicians. “The biggest challenges for Alphabet come from the regulatory side, both in the US and in Europe,” warned Mikko Ripatti, portfolio manager at DNB Asset Management.

The EU Parliament wants to regulate all large tech companies more strictly in the future. And in the US, numerous antitrust lawsuits have been filed against Google to break the company’s supremacy. That is also the goal of politicians on both sides of the spectrum in the US Congress.
If a new bill were passed by US Senator Mike Lee (Republican), Google would have to sell its advertising technology division. Support for the plan comes from Democratic Sen. Amy Klobuchar, who chairs the antitrust committee.

Alphabet CEO Pichai said Tuesday that he had urged Congress to take its time with the legislation and warned of “unintended consequences.” Congress should regulate areas where there is consensus, such as protecting children online . Otherwise, “American competitiveness could be hampered by penalizing only American companies.”

It is not yet foreseeable whether the critical legislative initiatives will meet with broad approval. In any case, Google shareholders should be satisfied with the group’s recent development: Earnings per share were $30.69, well above the analysts’ forecast of $27.35. Alphabet announced a 1-for-20 stock split. This will make the stock easier to trade after last trading above $2750. Apple and Tesla had already split their shares in 2020.

With agency material.

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