Alphabet grows on resilience of search spending

Despite the perception of Alphabet’s Google as an AI latecomer, the company’s search advertising operation appears not only resilient but a critical contributor to overall margin growth.

Why it matters

Despite moderated growth in global advertising spending, and the threat of Microsoft’s new OpenAI-enhanced Bing product, Google’s search advertising business – buoyed by growth in retail – has yet to yield to new threats. Across the board, Alphabet’s advertising products across Google and YouTube appear well placed across the theoretical advertising funnel to capture growth.

What’s going on

Alphabet’s Q2 results presentation this week was upbeat after it posted swifter year on year revenue growth of 7% to reach $74.6 billion for the quarter, according to an earnings release.

• Google ad revenues in Q2 grew 3.3% year-on-year to $58.1bn
• YouTube ad revenue over the same period grew 4.4%
• Google Network revenues, meanwhile, declined 5% year-on-year.
• Operating margins up one percentage year-on-year point to reach 29%
• Cloud revenue grew at 27% year-on-year

What’s driving this

In a good quarter for advertising, Ruth Porat, outgoing CFO, explained:

• “Google Search and other advertising revenues of $42.6 billion in the quarter were up 5%, led by growth in retail.
• “YouTube advertising revenues of $7.7 billion were up 4%, driven by brand advertising, followed by direct response, reflecting further stabilization in spending by advertisers.”

Search and AI

“Ads will continue to play an important role in this new search experience. Many of these new queries are inherently commercial in nature,” said CEO Sundar Pichai on a call with investors.

“There are inherent commercial user needs. And what's exciting to me is that SGE (search generative experience) gives us an opportunity to serve those needs again, better, right, and better.

“Nearly 80% of advertisers already use at least one AI-powered search ads product,” added chief business officer Philipp Schindler on the same call.

Sourced from Google, Seeking Alpha