Cloud Helps Google in the COVID-19 Crisis

Markets2

By: R. Scott Raynovich

Shares of Alphabet (GOOGL), the parent company of Google, vaulted 9% in early trading today on the back of earnings results as investors were relieved that the economic damage in the current COVID-19 health crisis was not as bad as feared.

Alphabet reported revenue that came in above Wall St. expectations even though earnings came in slightly below expectations. The company reported first-quarter earnings of $6.84 billion, or $9.87 a share, compared with $6.66 billion, or $9.50 a share, in the year-ago period. Revenue after removing special costs grew to $33.7 billion from $29.48 billion in the year-ago period. Analysts had estimated $10.71 a share, according to FactSet.

In morning trading, shares were up 116.13 (9.41%) to $1,349.

Cloud Growth Offsets Ad Decline

2020 futuriom primo pro 300x600

As expected, Google's results reflected a downturn in advertising during the Coronavirus pandemic, with the travel and entertainment industries taking a hit. Alphabet Chief Executive Sundar Pichai announced earlier this year that the company would cut spending and hiring for the year to prepare for a slowdown in advertising.

The company said it expects its core search and advertising business to shrink 15% year-over-year but that search traffic and ad revenue are already starting to bounce back. However, Google's results in cloud markets such as Google Cloud Platform (GCP) and YouTube continued to surge, as businesses and consumers hunkered down and consumed more digital bits.

YouTube and Google Cloud were 17% of revenues in 2019 and increasing at a 40% annual growth rate, so it's clear that investors are optimistic about that story, seeing it overcoming any weakness in ad spending and search.

Government and Healthcare Boost

Rohit Kulkarni, Executive Director with MKM partners, pointed out that Google is benefitting from cloud trend in the COVID-19 crisis, as virtual and cloud tools get more attention from the work from home (WFH) trend:

"Pandemic has led to more usage across Google assets: We think Google is a direct beneficiary from more use cases opening up in sectors such as government and healthcare. Also, more people are searching on Google, watching more YT videos, downloading Android apps right now; eventually Google thinks it can monetize such incremental user actions."

Overall, the current crisis has pointed out that Google's cloud efforts are starting to pay off and that investors see the real opportunity in GCP and YouTube for the future.

Another big driver of Google shares was corporate share buybacks. The company repurchased $8.5 billion worth of shares and has $12 billion in buyback authorizations remaining. The company has $117 billion in case on its balance sheet.