Alphabet Ad Revenues Nowhere Close to Slowing Down

GuruFocus.com

Sun, Jan 29, 2017, 5:08 PM

- By Sangara Narayanan

Alphabet (GOOG) (GOOGL) continued its double-digit quarterly revenue growth trend during the fourth quarter, posting a record growth of 22% compared to the prior period. Alphabet's revenue exceeded Wall Street forecasts, but profits came up shorter than expected. Analysts were expecting $25.26 billion in revenues and EPS of $9.64, but Alphabet reported $9.36 in earnings and $26.1 billion in revenues.

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Alphabet pointed fingers at a one-time tax adjustment for its earnings shortfall, as tax charges related to stock based compensation shot up to $586 million compared to $316 million a year ago.

But more importantly, Alphabet's trend of increasing clicks and decreasing cost per click continued during the quarter. Aggregate paid clicks, the total number of ad clicks recorded by Google Properties, increased by a huge 36%, while aggregate cost per click declined by 15% year over year.

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Throughout 2016, paid clicks has increased at high double-digit rates, which was more than enough to compensate for the declining cost per click rates. There are several reasons why this trend might continue for some more time before it starts stabilizing. Two significant reasons are the current shift from desktop to mobile, and increasing traffic from developing countries. Advertisers pay less for mobile ads compared to desktop ads, and the difference is even more stark when it comes to advertising revenue per user in a developed country compared to developing market.

These trends are affecting the paid clicks versus cost paid per click in a big way, and I don't think that trend is going to change anytime soon. What is important to note is that despite Alphabet crossing $25 billion in quarterly revenues, the company is still able to post double digit growth rates. That is despite increasing mobile usage and expanding user base in developed countries where the per-user earnings are significantly lower.

With online advertising having many more billions to cover over the next five years, Alphabet's strong double digit rates will continue for some more time before it starts stabilizing.