Google parent Alphabet Inc on Tuesday topped quarterly sales expectations for its advertising and Cloud businesses, helped in part by the pandemic, and said it will resume big spending on hiring and facility construction.
Google, which generates more revenue from internet advertising than any other company, benefited from lockdowns that drove retail and other clients online, helping offset cutbacks by travel and entertainment advertisers.
“Google’s products and support have been a lifeline for millions of small medium businesses hit hard by the pandemic,” Chief Executive Sundar Pichai told analysts on a conference call.
Chief Financial Officer Ruth Porat described the fourth quarter as a “great end to a challenging year.”
Alphabet’s 2020 sales growth of 13% was the slowest increase since 2009 when it posted 8.5% growth. Still, matched with spending cuts, Alphabet increased its cash hoard by $17 billion in 2020 to $137 billion.
But now with coronavirus vaccines deployed and advertising spending on the uptick, Porat and other executives said the company would return to expanding the Google Cloud business with staff and data centers and incorporating artificial intelligence into more services.
In a new disclosure, Alphabet said Google Cloud posted an operating loss of $1.24 billion in the fourth quarter and a $5.6 billion loss for 2020, about 21% steeper than 2019’s annual loss.
Google has long faced questions over whether it can spin the cash from its advertising business into a newly profitable venture. Pichai acknowledged that reaching that goal may take some time.
Aided by $3 billion in unrealized startup investment gains, Alphabet’s fourth-quarter profit rose 43% to $15.2 billion, or $22.30 per share, beating estimates of $15.95 per share.
Google’s advertising business, including YouTube, accounted for 81% of Alphabet’s record $56.9 billion in quarterly sales, which rose 23% compared with a year ago.
Cloud sales, also benefiting from the pandemic, were $3.83 billion, or $13.1 billion for the full year, up 46% from 2019.
Analysts tracked by Refinitiv had estimated quarterly revenue of $53.1 billion and Cloud sales of $3.82 billion.
Alphabet said it expects a $2.1 billion boost to operating results in 2021 after a new assessment extended the useful life of its servers and networking gear by a year or more.
COSTS, SCRUTINY SOW CONCERNS
Alphabet remains undervalued compared with some rivals. Microsoft Corp shares trade at 10 times expected revenue over the next 12 months and Facebook Inc seven times, while Alphabet shares about six times.
Rising costs, increased competition and a line of regulatory battles are among big concerns for Alphabet investors.
Alphabet’s costs to license programming for YouTube, operate data centers and stock consumer products have soared in recent years. Those other costs of revenue now account for about 27 cents for every $1 in sales, up from 23 cents four years ago.
Google’s lead over the global internet advertising market is shrinking as Amazon.com Inc becomes a bigger threat and China-focused vendors such as Alibaba grow quickly. Last week, research company eMarketer estimated Google will capture 30% of the market in 2021 while increasing sales by 18% to $117 billion.
Google is fighting antitrust investigations or charges across Australia, Asia, Europe and North America.
In addition, Google has threatened to pull its search engine from Australia if the country enforces new rules that would require the company to negotiate fair payments to news publishers to include their content in results.
Analysts also have expressed concern about potential revisions to content moderation and data privacy laws under new US President Joe Biden. Those laws currently favor companies such as Google.