Google parent Alphabet Inc. (GOOG, Financial)(GOOGL, Financial) reported an astounding first quarter that far exceeded analysts' expectations in several metrics. The numbers reveal that Google is the undisputed king of the digital ad hill.
Google, like many other online tech and cloud-based businesses, flourished during the pandemic. As Americans hunkered down in their homes during the coronavirus crisis, businesses of every stripe and color shifted their ad budgets from traditional media to online venues.
While many other companies profited handsomely from the pandemic, Google sailed through it, running downwind with a stiff, favorable breeze at its back. Due to its dominance in the digital ad marketplace, advertisers kept coming to Google because the company was like manna from heaven in terms of reaching customers across its vast ecosystem.
This included not only the reach and scope of the company's ubiquitous search engine presence, but also through its YouTube video platform, which netted $6 billion is sales — an almost 50% rise.
The numbers tell the story: profits soared a staggering $18 billion, or 162%, over the previous year; first-quarter sales of $55.3 billion represented a 34% increase over the same period last year, when ad sales plummeted as the coronavirus wreaked havoc on the world economy. The company had earnings per share of $26.29 versus the Street's consensus estimate of $15.64 — a 68% expectation shortfall. Net income tripled to $17.9 billion.
The company announced that it would commit an additional $50 billion for share repurchases, mollifying those shareholders who had been eyeing its swelling cash reserves.
Google has a lock on the market with its Maps, search engine and Gmail products, providing ample channels to offer advertisers who came to the fold with their marketing dollars. All three products generated $31.88 billion in sales — a 30% increase over the prior year. And even though the company's share of the American search advertising market has dropped last year from 61% to 57%, with Amazon.com Inc. (AMZN, Financial) nipping at its heels, the explosion in digital ad spending has helped Google deliver continuous revenue growth.
Even though the company is slowly diversifying from its core digital advertising business, its main product line is its search engine ad business, generating 81% of its revenue. Although the company is entering the cloud computing business, it is far behind its rivals Microsoft Corp. (MSFT, Financial) and Amazon. But its cloud unit nonetheless posted a 45% increase on $4 billion in revenue.
And now, the bad news for Alphabet. Given the mind-numbing results Google just reported, it's difficult to argue that the company's digital ad business could face potential headwinds from regulators, not only in the U. S., but in Europe as well. Margrethe Vestager, the EU's competition and digital-policy czar, has had the company in her crosshairs for years.
While her efforts have led to significant fines historically, the amounts have hardly put a dent in Google's size or market power. Belgium regulators are currently investigating tactics Google and other large tech-ad players use in digital ad auctions to determine if those practices violate European Union privacy law. Undoubtedly, other lawsuits related to privacy breaches and market power will be filed.
Additionally, multiple states' attorneys general, in conjunction with the Justice Department, have filed antitrust suits against Google, arguing it abuses its monopolistic search engine dominance to stifle competition. Most states have separate and distinct unfair and deceptive trade practices statutes that provide for assessing double or treble damages for violations. Thus, state regulators have two bites of the apple in their actions against Google. The state suits are proceeding and, given the tenacity of state regulators, Google has some unpredictable liability exposure. There is the risk that the litigation, or any consent decrees, could force the company to spin off some of its businesses.
The other litigation risk to Google not only in the U.S., but in Europe, is the growing consensus that the provisions of traditional antitrust law are outdated and ill-suited to reign-in the reach and scope of tech giants, given the new modern tech economy. The legal standard for violation of the Sherman antitrust statutes has always been consumer harm or consumer welfare. Given the fact that the business of social media companies thrives, it is difficult, if not impossible, to determine or argue consumers have been harmed by Google's business practices. This is a tough hurdle for regulators to surmount.
Many legal scholars and antitrust advocates have suggested that an alternative measure or standard, besides consumer welfare, be utilized in adjudicating monopolistic or anti-competitive business practices. Should the Justice Department or any novel court rulings adopt such a stance, the risks to Google would be significant, as the playing field would be dramatically different.
Disclosure: I have no position in any of the securities referenced in this article.
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