When it comes to dealing with shareholders, has Google’s parent, Alphabet, turned over a new leaf?

The decision of co-founders Larry Page and Sergey Brin to step away from day-to-day involvement in the tech-holding company last month stirred hopes on Wall Street that Alphabet would take on more of the trappings of a conventional company when it comes to dealing with shareholders.

So it was notable that, with his first quarterly earnings report on Monday, new boss Sundar Pichai gave Wall Street something it had long wanted: a look under the covers, with a new level of disclosure about the group’s YouTube and cloud computing divisions.

The heightened transparency was accompanied by other vestiges of a more shareholder-friendly approach. These included a promise to apply a “sharper focus” to investment in Alphabet's “moonshot” projects, where losses have been mounting, and a commitment to at least maintain a stock buyback program that reached $18.4 billion in 2019, more than double the year before.

It was unfortunate, then, that Pichai’s first quarter flying solo was sullied by lackluster figures.

The Google search advertising business is still going strong, but non-advertising revenue came up well short of expectations, due mainly to a decline in hardware led by weaker sales of the Pixel smartphone. Also, the company’s operating profit margin slipped as losses from its moonshot projects—including its driverless car, drone delivery, and drug discovery units—jumped more than 50 percent, to $2 billion.

The news sliced $40 billion from Alphabet’s stock market value in after-market trading on Monday, robbing it of the $1 trillion market valuation it first obtained last month.

Full disclosure

But if Wall Street was unimpressed with the business performance in the latest quarter, the heightened disclosure received a much warmer welcome.

“This is the best Alphabet call I’ve been on since I’ve been covering the company,” said Heather Bellini, who has followed the company as an analyst at Goldman Sachs for nearly a decade. Other analysts used the company’s earnings call on Monday to try to dig deeper into businesses that had long been opaque to outside investors—though with limited success.

“It’s a positive—but it obviously brought more questions to the fore,” said Youssef Squali, an analyst at SunTrust. Among the most important details Alphabet left out, he added, was the level of profits or losses in the businesses.

The new disclosure confirmed that the YouTube and cloud computing divisions are growing strongly. But neither fully lived up to what was hoped of them.

At YouTube, advertising revenue topped $15 billion in 2019—more than that of the US TV networks ABC, NBC, and Fox combined. But growth slowed to 31 percent in the final quarter, a marked deceleration from the 38 percent of the previous nine months. The video service came under fire last year over some of the content it was promoting to users, leading it to promise changes to its algorithms that some warned could weaken viewer engagement.

With YouTube claiming an audience of more than 2 billion, the new disclosure suggested that it is making $7 to $8 a year in advertising revenue for each user. That is roughly in line with the $7.38 per user that Facebook generates across its family of apps, and more than the $5.68 of Twitter.

Most of that money is coming from “brand” advertising, leaving plenty of room for growth in the direct response style of advertising that is Google’s forte, said Pichai. That could become “a huge growth area for us,” he said, as Google looks to turn YouTube into a platform for online commerce.

Google’s cloud division, meanwhile, is rapidly turning into the most promising business beyond advertising. Its revenue grew 53 percent in the latest quarter, to $2.6 billion.

That makes it two-thirds larger—and growing at a faster rate—than Amazon Web Services was when figures for the Amazon cloud business were first disclosed nearly five years ago.

Assessing exactly how well Google is doing in trying to catch up with Amazon and Microsoft, however, is not easy, given the different nature of their businesses.

Much of Google’s cloud revenue comes from its G Suite of online applications, meaning that its Google Cloud Platform—the part that competes with Amazon—probably only accounted for half of total cloud revenue last year, according to Brent Thill, an analyst at Jefferies.

Also, the overall cloud growth rate is mediocre compared with Microsoft’s Azure cloud platform, which reported a reacceleration in growth to 62 percent in the most recent quarter, said Squali. That probably explains why Alphabet executives were at pains to stress what they called “extraordinary revenue momentum” in the GCP portion of the business in the final quarter, he added.

Revealing more about the performance of these divisions, meanwhile, did little to address another long-running complaint from Wall Street: that Alphabet is spending too much money trying to diversify beyond its original search operations.

The long game

Echoing the position when Page was still at the helm, executives stressed the long-term nature of their investment horizons while pointing to continued strong spending in the near term. Both headcount and capital spending were likely to rise faster next year as Google completes the acquisition of Fitbit and continues to build out its global infrastructure to meet the demands of AI and the cloud, executives said.

However, when it comes to Alphabet’s “other bets”—its moonshot projects—there was a distinct change in tone.

Pichai pointed to the way Alphabet’s Verily and Calico healthcare arms had partnered with other big companies as a model of what he hoped to do with other divisions. This would help Alphabet work on a larger canvas “without trying to stretch a single management team across different areas,” he added.

Ruth Porat, Alphabet’s chief financial officer, also hinted heavily at a more hard-headed investment stance. Alphabet was applying a “sharper focus” to the criteria it uses to decide when to pump more investment into its moonshots, she said. It was also weighing whether bringing in more outside investors, as it had with Verily, would be “additive to governance and execution.”

That could have significant consequences for the future of Alphabet, which Google's founders launched five years ago to handle their expanding tech ambitions.

“Once you let in outside investors, there has to be a liquidity event on the horizon, whether that’s an IPO or a strategic sale,” said Squali. If so, then Alphabet’s new leaders may just have signaled the start of a slow-motion break-up of the tech holding company they have inherited.

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