‘The core Google business is generating mind-boggling quantities of cash’

Google’s parent company, Alphabet, has reported full year revenues of $182.5bn, up 12.8% year-on-year and modestly ahead of market expectations.

That reflects very strong revenue growth in the Cloud business, as well as good performances from Search and YouTube.

Operating profits rose 20.4% to $41.2bn, beating analyst forecasts by some margin. That was driven by growth in the core Google business and the non-recurrence of fines incurred in 2019.

Google Services – which includes the core advertising, search and YouTube businesses – saw revenues rise 11.1% in the year to $168.6bn. Advertising revenues across all platforms rose 21.8% in the final quarter of the year, driven by 46% growth in YouTube ad revenues. Full Year operating profits in the division rose 11.4% to $54.6bn.

Google Cloud revenues rose 46.4% to $13.1bn. However, operating losses increased to $5.6bn from $4.6bn a year ago. Revenues in the ‘Other Bets’ business, which includes various moon-shot programmes, were flat at $657m, while operating losses fell 7.2% to $4.5bn.

Full year free cash flow of $42.8bn was well ahead of $31.0bn reported in 2019, reflecting the substantial increase in profits and a modest decline in capital expenditure.

Alphabet had $122.8bn of net cash on the balance sheet at the end of the year, up from $115.1bn a year ago.

Ruth Porat, CFO of Google and Alphabet, said: “Our strong fourth-quarter performance, with revenues of $56.9bn, was driven by Search and YouTube, as consumer and business activity recovered from earlier in the year. Google Cloud revenues were $13.1bn for 2020, with significant ongoing momentum.”

Alphabet shares rose 5.3% in aftermarket trading.

Industry reaction

Nicholas Hyett, Equity Analyst at Hargreaves Lansdown

Advertising is meant to be a cyclical industry. When times are hard companies pull in their horns, batten down the hatches and cut the advertising budget. Well times don’t get much harder than they have been this year – and yet Google’s various ad platforms are doing better than ever. It’s testament to the centripetal force Google’s one-stop-advertising-shop, exerts on marketing teams.

Traditional advertising industries are crumbling one by one. Print media is shrinking, traditional ad-supported TV is under attack from streaming groups and lockdowns have frozen outdoor advertising in time. That leaves most businesses with no choice but to advertise online if they want to reach customers – and for many that means advertising through Alphabet. YouTube, slots on third party website and search give the US tech giant immense reach.

The spoils of the advertising wars are being poured into new, and loss making, ventures. Cloud is growing incredibly quickly, but appears to have negative margins – actually losing money on every new sale. Other Bets that range from self-driving cars to life sciences barely generate any revenues let alone profit. One day one of these moon-shots could be as world changing as Google itself, but that’s some way off at present.

None of that matters though. The core Google business is generating mind-boggling quantities of cash, and the group has a cash war-chest stretching well past $100bn. It could afford to buy out a FTSE 100 company every year and the balance sheet would hardly notice the difference.

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