Times are rapidly changing for technology companies and Alphabet Inc C (O:GOOG) has not been spared. The writing on the wall, it seems, is that you are either an agent of change or a change adopter or you are nothing – doomed. How has the wave of change that is sweeping the technology industry impacted Alphabet?
With increasingly more people using mobile devices than desktops, Alphabet is now betting its future on mobile. But is it getting anywhere on that front?
It’s a mobile movement for Alphabet
In the 3Q2015 earnings call, Alphabet’s management shared perhaps the most important data they have shared in recent times: more than 50% of search traffic is now flowing through mobile. That plainly means that mobile searches have surpassed desktop searches, which is a key milestone for a company which criticism thought was doomed in the ongoing shift to mobile from desktop platforms. In the previous update, Alphabet reported that mobile search had overtaken desktop search in the U.S. and nine other countries.
What is in mobile?
The reason Web companies, such as Alphabet, Facebook Inc (NASDAQ:O:FB) and Yahoo! Inc. (NASDAQ:O:YHOO), are seeking deeper presence in mobile is that it is the future.
- For marketers, mobile provides a greater touch opportunity with potential customers because people are always closer to their mobile devices than they are to their desktop computers.
- There are more mobile users in the world than there are desktop users. Perhaps that can also be explained by the fact that smartphone adoption is more rapid than desktop, a trend that is partly fueled by the falling cost of smartphones. There are now more than 1.4 billion Android-based mobile devices compared to just 1 billion in the previous update.
- Mobile provides marketers with an opportunity to reach potential customers when they are most receptive for a purchase suggestion. Therefore, targeting mobile ads is not only easy but more efficient, thus leading to greater ROI for marketers.
Mobile is promising to be a major ad revenue engine for Alphabet Inc (NASDAQ:GOOG). With rapidly growing mobile users, better mobile ad targeting tools and an improving number of mobile advertisers, Alphabet stands to see its mobile cost-per-click (CPC) improve. Mobile usually attracts lower CPC than desktop, which is why overall CPC in 3Q dropped 11%. However, the decline is expected to be short-lived as rapid mobile growth and better targeting tools offset the soft mobile CPC.
Moreover, as mobile search volumes rise above desktop search, Alphabet is able to unlock more monetization opportunities.
Digital video movement – YouTube
The rise in mobile traffic against desktop also bodes well for Alphabet Inc (NASDAQ:GOOG) on the digital video front. YouTube is already a popular online video platform and with the rise in mobile streaming, Alphabet stands to unlock more revenue opportunities through YouTube.
With more people coming to consume videos online, marketers are shifting their video advertising dollars away from legacy television channels to digital channels such as YouTube. As such, with more high-quality mobile traffic flowing to YouTube, there is opportunity for Alphabet to squeeze more ad revenue from the video-sharing platform.
To diversify its digital revenue beyond ads, Alphabet recently introduced YouTube Red, a subscription version of YouTube that attracts a cost of $10 per month and is devoid of any kind of ads. The introduction of YouTube Red also comes amid a rise in ad-blocking practices.
Other takeaways from Alphabet
Doubleclick – automated ad buying service
Alphabet’s Doubleclick service automates ad purchase and placement, thus allowing Alphabet to serve a growing number of advertisers more efficiently. The company recently said that 80% of its top 100 advertisers buy ads through the programmatic system, and more are likely to fall in love with it over time.
$5.1 billion buyback
Alphabet announced a $5.1 billion buyback program authorization – a first for the company. Although that is only a tiny fraction of the nearly $73 billion of cash stockpile in Alphabet’s account, the move does signal increasing shareholder orientation in the company.
With increased cost-reduction and disciplined spending as favored by CFO, Ruth Porat, Alphabet could save more money to return to shareholders.
Alphabet in full-blown smartphone business
There are speculations that Alphabet Inc (NASDAQ:GOOG) is plotting to produce its own line of Android smartphones in-house. For its Nexus line, Alphabet contracts third-party manufacturers to produce it, but the new dispensation could see the company have a broader smartphone business than the current Nexus. Additionally, reports say that Alphabet is interested in setting up its own phone production factories, thus taking full charge of designing, producing and marketing its next line of Android smartphones.
The strategy is expected to enable Alphabet to plug the holes in Android ecosystem, thus allowing Android phones to bolster their competitive advantage against Apple Inc. (NASDAQ:O:AAPL)’s iPhones.
3Q earnings highlights
Alphabet reported 3Q2015 total revenue of $18.6 billion, up 13% from the same period last year. The operating income of $4.7 billion for the quarter was 2% above the same quarter a year ago. The spike in mobile search contributed to improved financial performance in the quarter.
Potential pressures
Ad spending slowdown
Marketers sometimes hold off ad spending to digest what they have done in a particular period. While Alphabet Inc (NASDAQ:GOOG) has survived multiple “digestion phases” in its life, prolonged slowdown in ad spending could lead to material adverse disruption.
Moonshots and bloated opex
Alphabet has multiple experimental projects underway. Most of the so-called moonshots or Other Bets are either generating revenue that is not commensurate with what they are taking in or are spewing losses. However, regardless of the degree of their loss, the projects have to be funded until they are able to contribute meaningful revenues or become profitable. That means sustaining high opex for a mostly unforeseeable future. Some of these projects can consume money and fail to live up to expectations, thus leaving Alphabet thin on free cash flow.
Ad-blocking threat
People are finding ways to block ads from showing on their screens. However, the ad-blocking movement is toxic for Alphabet given that the company’s business is almost entirely funded by ads. It doesn’t look like Alphabet has immediate solutions to the problem of ad-blocking. The company only recently moved to introduce subscription-based YouTube Red to try to mitigate the impact of ad-blocking on the income of its content creators.
Bottom-line
Despite pressures, which are normal in any business, Alphabet Inc (NASDAQ:GOOG) is on solid grounds and a more brilliant future is about to unfold in front of it.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.