Google, uh, Alphabet shows further signs of growing up
They've come a long way from the letter Larry and Sergey wrote to IPO investors in 2004...
The Ruth Porat era at Google is off to a promising start.
In late May, Porat signed on as Google's CFO after serving the same role for Morgan Stanley for five years. Since then, Google has adopted a new structure, renamed itself Alphabet, and delivered two earnings reports that have left investors in a giddy mood.
In July, Google reported a profit well above Wall Street's estimates, driving the stock 14 percent higher. This week, Google again beat its revenue and profit estimates, pushing the stock up as high as 10.5 percent to an all-time high of $752 a share. The earnings beat may not have been quite as impressive this time, but Porat had another treat for investors, a plan to buy back $5.1 billion of Google shares.
Actually, Google announced a plan to buy back $5,099,019,513.59 worth of its stock (here's the reason for that figure, but be warned: there is such a thing as a too-cute math joke). Technically, it's not Google's first buyback. In the past, Google has repurchased shares following an all-stock acquisition like the AdMob deal in 2009.
This larger buyback program marks a shift toward the model Apple and older, cash-rich tech giants have employed of returning more profits to shareholders. After all, Google has $73 billion in cash. It's the kind of investor payout some on Wall Street have been pushing for for a while. Some estimated such a move would drive up its share price by 10 percent overnight. Which is very close to what happened last night.
The buyback may have been the biggest reason for Google's stock gain, but it wasn't the only one. What all of them have in common is a single theme: Google is acting and sounding more like an adult. Albeit an adult that is growing revenue by 13 percent and operating profit by 25 percent. And that's not a bad thing at all.
Much of that adult tone is coming from Porat. Google has come a long way from the letter Larry and Sergey wrote to IPO investors in 2004, tweaking any expectations that the company would put its shareholders first. Under previous CFO Patrick Pichette, Google did an admirable job balancing its investments in newer projects with the demands of the quarterly earnings circus.
In 2014 and much of 2015, though, Google's stock had flatlined as investors worried that Google's core ad business was weakening in the mobile era while it busied itself with unproven markets like self-driving cars. In the past six months, Google's stock has been rising as the company showed it's addressing both of those concerns.
Excluding the effect of a strong dollar, Google/Alphabet's revenue rose 21 percent from the same quarter a year ago. Paid clicks grew 23 percent, faster than the 18-percent growth last quarter and the 13-percent growth two quarters ago. That more than offset a 11-percent drop in cost-per-click rates, much of which is tied to rising views of YouTube, which has had lower click-through rates.
The company also talked up the growth in mobile ads. In the earnings release, Porat touted the strength of the mobile search business as well as the “substantial growth” in its revenue. Sundar Pichai, the new CEO of Google Inc inside Alphabet, said in the earnings call that more than half of searches occur on mobile, but wouldn't say when mobile search ads would catch up.
Despite the lack of any compelling data on the mobile growth, investors seemed to accept that Google is gaining ground. “Mobile gives us very unique opportunities in terms of better understanding users, and over time as we use things like machine learning, I think we can make great strides,” Pichai said. “It is as compelling or in fact even better than the desktop, but it will take us time to get there.”
Meanwhile, the company continues to pare back its capital expenditures. In the past two quarters, Google's capex totaled $4.9 billion, a 25-percent decline from the spending in the previous six-month period. “Our priority remains revenue growth, which doesn’t give us a pass on rigorous attention to expense growth,” Porat said in the earnings call. “We need to ensure that resource prioritization is a key part of all that we do.”
So while resource prioritization is coming to Alphabet's still-developing moonshots, the company is giving back billions to shareholders. That's an abrupt shift from the earlier days Google, but one in keeping with the maturing tech company Porat is helping to shape. Investors are eating up this story, although it may come at the expense of the so-called other bets Google is building around its core business.
That said, some of those other bets are going to be demanding more capex next year, Porat warned, particularly in the division that contains Fiber as well as hardware devices like Nexus and the Chromebook Pixel. What's more, Alphabet still faces stiff competition in many of its current and future areas of business. None of this is new. What's changed is the company's ability to convey its message better to investors.
Many credit this to Porat, who has been building more bridges between the Googleplex and Wall Street. A lot of the work of managing shareholders is simply a matter of attitude adjustment, communicating to them the way a teacher would to a classroom of grade-school students. Some teachers have the classroom eating out of their hands. Others wonder why those kids can't behave. Porat's years on Wall Street have put her soundly in the former camp.
That is a lesson that other tech executives speaking on earnings calls can learn from. Memorably, Twitter's stock plunged after its new CEO offered blunt talk that played well in Silicon Valley but freaked out Wall Street. In contrast, Porat has discussed Google's challenges while quietly engineering a restructuring of its operations in way that has led the stock price to an all-time high.
Increasingly in tech, maturity means thinking and acting like a startup, while speaking like an adult.