Alphabet, Inc (GOOGL - Class A and GOOG - Class C) makes money through the Google Search engine, YouTube, Google Play, Google Cloud, Chrome browser, and Android mobile operating system. In addition, the company has made considerable investments in the Stadia cloud gaming system, Waymo self-driving vehicles, and other technology initiatives. They currently hold the third-highest capitalization in the U.S. stock market, behind Apple Inc. (AAPL) and Microsoft Corp. (MSFT). 

Key Takeaways

  • Alphabet leverages its search, web browsing, and mobile operating systems to make money through the sale of advertising, apps, subscriptions, hardware, licensing, and service fees.
  • Advertising generates the majority of revenue, but Android income has increased since the recent introduction of licensing fees.
  • Alphabet is developing high tech products that could add substantially to revenue in coming years.
  • The U.S. Department of Justice is reviewing Alphabet's acquisition of Fitbit over concerns that it would give Google access to sensitive health information.
  • Alphabet was fined $3.7 billion this year by the European Union for ‘abusing the online advertising market’.

Alphabet’s Financials

Alphabet’s market cap has risen to just over $900 billion in Q4 2019. They earned $30.7 billion in net income in the 2018 fiscal year, a sharp increase from 2017’s disappointing $12.7 billion, which marked a 36% decrease from 2016. 2018 annual revenues at $136.8 billion represented a major increase from 2017’s $110.9 billion and 2016’s $90.3 billion. Revenue growth has been steady and strong since 2018, with an 18.7% year-over-year (YoY) increase in the first three quarters of 2019. Net income has risen at a slower but solid 8.6% YoY pace.

Alphabet’s Business Segments

Alphabet separates all business services other than Google operations into ‘Other Bets’. According to the company, “Google is our only reportable segment. None of our other segments meet the quantitative thresholds to qualify as reportable segments; therefore, the other operating segments are combined and disclosed as 'Other Bets'.

Other Bets include Access, Calico, CapitalG, GV, Verily, and X. This catch-all also features developmental and early commercial stage projects, including the Waymo self-driving system, which is undergoing extensive testing in Arizona and other states, and the Stadia cloud gaming system.

Google

The Google segment generated more than 95% of all Alphabet revenue in Q3 2019 and the first 9 months of 2019. Segment operating income (profit after expenses such as wages, depreciation, and cost of goods sold) showed a 14% increase during the first 9 months of 2019, compared to 2018. 

Advertising generated 71.0% of all segment revenue in Q3 2019 and 70.8% in the first 9 months of 2019. This percentage has remained unchanged in recent years, with 70.9% in 2016, 70.5% in 2017, and 70.7% in 2018. Advertising revenue grew 20% in 2017 and 22% in 2018, but the pace slowed to 16% in the first 9 months of 2019.

Paid clicks rose 18% YoY in Q3 2019 compared to Q3 2018, while increasing just 1% between Q3 2019 and Q2 2019. Cost per click dropped 2% YoY in Q3 2019 while increasing 2% from the prior quarter. 

Other Bets

In this segment, revenue grew 65% in 2017 and 24% in 2018. This deceleration continued in the first 9 months of 2019, with revenue growth slowing to 10%. Segment revenue as a percentage of total Alphabet revenue has remained constant through these periods, indicating the majority of revenue growth has come through the larger Google segment.

This segment has reported an operating loss in every fiscal year since 2016. 

Alphabet’s Recent Developments

Company Founders Larry Page and Sergey Brin announced on December 3 that, effective immediately, they would step down from corporate roles. Page has joined the Alphabet board while Google CEO Sundar Pichai has assumed the helm at Alphabet and Google. They are not replacing Brin’s position as Alphabet’s president. The news was initially well received by Wall Street, lifting Class A and Class C shares more than 5%.

Alphabet, which was fined $3.7 billion by the European Union in May 2019 , is the subject of a second EU investigation that's examining methods used by the Google search engine to collect data. In July 2019, the U.S. Department of Justice advised that it was opening an anti-trust review of big tech companies, including Alphabet. That investigation is ongoing and could become a 2020 campaign issue. Senator Elizabeth Warren criticized Page in a December 4 tweet, warning the transition to the company board wouldn’t relieve his obligation to testify before Congress.