ALPHA BET

Google is winning

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When Google reported its fourth-quarter earnings this week—its first report since reorganizing as Alphabet—arguably the most important number announced was 24%. That is the rate, excluding the effects of foreign currency, that Alphabet’s revenue grew compared to the fourth quarter of 2014. (Including the effects of currency, it grew 18% to $21.3 billion.)

This despite:

  • The global shift to smartphones as a primary internet device, a transition—now several years in—that many worried would have a dramatic negative effect on Google’s core advertising business.
  • The rise of Facebook as a formidable mobile-advertising rival. Facebook reported last week that its fourth-quarter sales would have grown 60% year-over-year if not for the effects of foreign currency, and it generated 80% of its advertising revenue last quarter on mobile.

In fact, Google is not only growing, but its growth is accelerating. Organic growth—excluding foreign currency and hedging—for its ad business also grew an estimated 24% year-over-year in the fourth quarter, according to RBC Capital Markets analyst Mark Mahaney, in a report this week. That’s an acceleration both over the third quarter’s growth rate (21%) and the 2014 fourth quarter’s rate (18%).

“Such consistency is a rarity, especially for a behemoth business, and we view the continued consistent growth as a positive,” Mahaney writes, “though we expect this to taper over time with continued growth in scale.”

Mobile, meanwhile, was cited by Google as a reason supporting its growth, not detracting from it. The “primary driver” for Alphabet’s revenue momentum during the fourth quarter, CFO Ruth Porat said on the company’s earnings call, “was the increased use of mobile search by consumers, benefiting from our ongoing efforts to enhance the efficacy of mobile search as well as from the holiday season.”

To be sure, Google does not disclose the percentage of its revenue that it generated from mobile the way Facebook does. (Google did say October that more than half of all worldwide search queries are conducted via mobile.) And its ad business remains mostly an opaque mystery from the outside. YouTube, meanwhile, is surely driving a hefty portion of growth—enough to have a negative effect on the company’s cost-per-click rates.

But the reality is that the smartphone revolution has already happened—around 80% penetration in the US—and Google’s core business has not collapsed.

The other big number Alphabet announced was $3.567 billion. That is the amount of money Alphabet lost in 2015—reported as operating loss—for its new “Other Bets” segment, where the company’s “moonshot” investments like self-driving cars, Google Fiber, Nest, life sciences, and Google X now sit on the balance sheet.

Frankly, it didn’t come across as much of a shock. If anything, it confirmed—without sharing many details—that Google/Alphabet founders Larry Page and Sergey Brin hadn’t spent the last several years burning zillions of dollars on crazy schemes behind everyone’s backs (the Other Bets operating loss in 2014 was $1.9 billion).

For a company that generated about $75 billion in revenue last year, $19 billion in operating income, has plenty of cash in the bank, will eventually run out of growth in its core business, and is run by two geniuses who already built Google, that seems like a reasonable amount to sink into next-level R&D. (While Alphabet is spending hundreds of millions of dollars on Google Fiber, which is essentially a US cable company, it is also generating potentially useful intellectual property in its other bets, which require lower capital expenditures.)

And Alphabet’s new corporate structure—as well as its limited disclosures of Other Bets revenue and losses—will now make them a little more transparent about it, without revealing that much. Investors seem fine with it so far: Shares are up about 2% since the release.

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