Once again, Alphabet made a lot of money on Google advertising and this time Wall Street is thrilled

Everything else is just shadows.
Everything else is just shadows.
Image: AP Photo/Jeff Chiu
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Alphabet, and Google before it, has made a habit of making the impressive look mundane.

Alphabet reported its 2017 first quarter earnings today, and unsurprisingly, the numbers were stunning. The company reported revenue of $24.7 billion—its second largest quarter ever—a 22% increase over last year’s first quarter.

“Our excellent results represent a terrific start to 2017,” Alphabet’s chief financial officer Ruth Porat said in a release. “We clearly continue to benefit from our ongoing investments in product innovation and have great momentum in our new businesses across Alphabet.”

The company’s results were warmly received by Wall Street. Alphabet’s Class C stock rose some 5% to over $46 a share during in after-hours trading. This is in contrast to last quarter, where Alphabet also generated massive amounts of revenue, but missed slightly on what Wall Street was expecting, which caused a steep overnight drop in stock prices.

Advertising is still Alphabet’s cash cow

Everything that isn’t Google’s search, display, and video advertising is pretty much a rounding error on Alphabet’s revenue, with Other Bets accounting for an almost-nonexistent 0.01% of total revenue. Google’s operating income was more than $7.5 billion, whereas Other Bets lost Alphabet $855 million in the quarter. Google is embedding artificial intelligence into all aspects of its business, with AI now powering search, and Google CEO Sundar Pichai said on the company’s earnings call that it’s bringing machine learning intelligence to its advertising options, using AI customize clients’ campaigns, and bring them under all of Google’s platforms.

Google’s cloud is growing

On the company’s earnings call, Porat said that the cloud business accounted for the company’s biggest growth in capital expenditure and headcount. While the overwhelming majority of Google’s revenue comes from advertising, it has recently started to push its enterprise cloud services business, which could potentially represent a way for the company to diversify beyond digital ads. Alphabet lumps its Google revenues into two buckets—advertising and “other revenues,” which includes its cloud business, as well as things like its hardware sales and Android app downloads. Last year, this bucket accounted for more of Google’s revenue than it had the previous year (11.3% versus 9.6%), totaling $10 billion. In this quarter alone, Google generated $3 billion in “other revenues,” an increase of 50% over the same quarter the year before. Extrapolated across a year, this quarter’s revenue would mean “other revenues” would now be a roughly $12 billion business for Google.

Hardware is a mystery

In October, Google launched a line of self-branded devices, including the Pixel smartphone and the Google Home smart speaker. Beyond their own value as useful devices, they were arguably attempts to leverage what Google does best (search, mail, maps, apps) and use them to keep customers locked into its ubiquitous software ecosystem, something that Apple also has attempted to do. Alphabet hasn’t broken out any sales figures to indicate how its new devices have been received. While, as mentioned above, Google’s ”other revenues” were up sharply from the year-ago quarter, the company didn’t break down the figure between hardware sales, cloud services, and everything else. Pichai said both devices were “well received” by consumers, but didn’t comment further.

Other Bets remain just bets—for now

Alphabet’s other companies, which range from relatively mature companies like Nest to research divisions like the X lab and Verily Life Sciences, are still hemorrhaging money. Alphabet’s desire to find a “moonshot” answer to problems like curing death and cars that drive themselves cost the company $855 million in the last quarter, amassing only $244 million in revenue.

But it’s not all bad news for Other Bets. Revenue is growing for the segment—by 47% over the same quarter last year, even if that still represents a tiny fraction of Alphabet’s revenue. CEO Larry Page said in his letter to investors earlier today that he’s excited (he used this word a lot) about the future of many of the Other Bets companies, and it’s entirely possible that the value of companies like Waymo could even outstrip the billions Google currently generates for Alphabet. And it doesn’t seem like Alphabet will run out of cash to keep funding these moonshots anytime soon.