After entering 2022, the report cards of many technology giants in Silicon Valley are not very good, and Google, which has just announced its second-quarter earnings, is no exception: the year-on-year growth rate of revenue has slowed down sharply, net profit has declined significantly, and the main advertising business has also hit a growth ceiling... Behind a flurry of adverse news, Google's anxiety is escalating.

There is no doubt that the global Internet advertising market is still huge, and Google's market share is also unique. But the sluggish economic environment and the rise of new social products such as T-Tok have put a lot of pressure on it.

Data shows that T-Tok currently has more than 1 billion active users around the world, and last year it surpassed Google to become the world's most visited website. According to the institutional survey, T-Tok Ad revenue in 2022 will more than triple from last year, more than Snapchat and Twitter combined, and attack Google's throne.

In the face of various challenges, Google is preparing for two things: on the one hand, it joins the short video track and faces T-Tok head-on, and on the other hand, it actively explores new businesses and looks for a second pole of growth. Unfortunately, cloud computing, life sciences, autonomous driving and other businesses have different degrees of problems.

Who can prop up Google's future? Google is also curious to know the answer to this question.

A number of data fell short of market expectations, and advertising overlord Google fell to the altar?

After the US stock market on July 27, Beijing time, Google's parent company Alphabet announced its financial results for the second quarter of fiscal 2022, and the results were disappointing: revenue, net profit, earnings per share and other data were lower than market expectations, and Google, lying down and counting money, could not escape the hard hit of the Internet winter.

But interestingly, after this slot-filled earnings report, Google's after-hours stock price did not fall but rose, and the stock price remained above the $110 mark at press time, up nearly 4% from the closing price.

In this way, does Google's seemingly bad earnings report also send some positive signals? We believe that the growth outlook and the foil of peers are important factors supporting Google's stock price.

Last week, Snap and Twitter reported a series of "thunderstorms", and the outside world's expectations for Google have already fallen to a trough. After lowering expectations, the resilience of Google's advertising business, as well as the level of gross profit that was basically in line with expectations, was enough to satisfy the capital market. After all, under the Internet winter that swept the world, we can no longer ask Google to do more.

Putting aside the noise from the outside world, in-depth analysis from various dimensions such as revenue, profit, cost and revenue structure may help us see the problems and opportunities encountered by Google.

First, look at the revenue data. According to the financial report, Google's total revenue in the second quarter was $69.685 billion, a year-on-year increase of 12.6%. However, in terms of revenue growth, the downward trend is quite obvious. From the second quarter of last year to the first quarter of this year, Google's revenue growth rate recorded a year-on-year growth rate of 61.6%, 41%, 31.4% and 23%, respectively. In contrast, the year-on-year growth rate of less than 13% in the second quarter of this year is already the lowest point in the past two years and lower than the market expectation of 13.52%.

Secondly, the profit side is not performing well. Data show that Google's net profit in the second quarter was $16.002 billion, down 13.6% year-on-year. The outside world has focused on the performance of Google's revenue and net profit in the second quarter, focusing on the year-on-year growth rate. Compared with the positive revenue growth, the net profit, which has fallen year-on-year for two consecutive quarters, is undoubtedly more worrying.

In addition, other data show that since the third quarter of last year, Google's operating profit has been in a state of decline, recording 21 billion, 21.9 billion, 20.1 billion and 19.5 billion US dollars in the past four quarters, respectively, and the year-on-year growth rate has plummeted from 203.3% in the same period last year to 0.5% now, basically stagnating.

But thankfully, Google's gross profit levels are fairly stable beyond its poor revenue and net profit. Data show that Google's gross profit and gross margin in the second quarter recorded $39.6 billion and 56.8%, respectively, exceeding Wall Street expectations. Compared with historical data, Google's gross margin is even at a high level in the past three quarters.

In the case of slowing revenue growth, it can maintain a considerable gross profit level, which shows that Google's cost control is quite successful.

According to the financial report data, Google's revenue costs, R&D expenses and sales and marketing expenses in the second quarter increased year-on-year, but they were basically in line with market expectations. Especially in terms of the main advertising business, Google's traffic acquisition cost in the second quarter was only $12.21 billion, lower than Wall Street's expectation of $12.41 billion.

Finally, look at the revenue structure. As we all know, advertising is Google's most important revenue pillar, and the contribution of cloud computing and other businesses is still quite limited. Data show that Google's advertising revenue in the second quarter was $56.3 billion, a year-on-year increase of 11.6%, basically in line with expectations. Among them, Google Search, YouTube and Google Alliance generated revenues of $40.7 billion, $7.3 billion and $8.3 billion, respectively.

However, like the group's total revenue, Google's advertising business has also experienced a slowdown in growth, both sequentially and year-on-year. Data show that in the second quarter of last year and the first quarter of this year, Google's advertising business revenue was 50.4 billion and 54.7 billion US dollars, respectively, corresponding to year-on-year growth rates of 68.9% and 22.3%.

Of Google's major products, YouTube's performance is the most worrisome. In the second quarter, YouTube's advertising revenue only recorded a year-on-year increase of less than 5%, which was lower than the overall growth rate of Google's advertising business. Over the past few years, travel, services and retail have all been YouTube's main sources of advertising. Considering the high inflation environment in the United States and the recession of the retail consumer market, advertising money owners are holding their wallets, and it is difficult for YouTube to turn around against the wind in the second half of the year.

With the rise of short videos, especially T-Tok's popularity, video apps such as YouTube have felt a lot of pressure. To alleviate growth anxiety internally, and to deal with T-Tok challenges externally, Google has a lot of tough battles to fight.

Contrary to T-Tok, Google's anxiety is escalating In the position of Internet advertising, search is a very important sector, and Google is the absolute hegemon in this field. Data show that in 2021, Google's advertising revenue was 148.951 billion US dollars, accounting for 47.7% of the Internet advertising market, accounting for nearly twice that of the second-ranked Meta (26.2%).

However, as mentioned earlier, the growth rate of advertising business in some channels such as social and video is declining, and YouTube is the first to bear the brunt.

A survey released by Bloomberg late last year showed that many advertisers have begun to reduce their use of Meta Aggressive efforts on social platforms such as FoA, YouTube, LinkedIn and Twitter. Of those, 21 percent said they would maintain their existing partnership with YouTube but not increase delivery, while another 17 percent said they would reduce their delivery. Horizontal comparison can also find that competitors such as Meta have encountered the dilemma of advertisers fleeing.

The reason why the attractiveness of these established social software to advertisers will decline is that it is trapped in a sluggish economic environment on the one hand, and new social products such as T-Tok on the other hand.

According to data agency Cloudflare, T-Tok is the world's most visited Internet site in 2021 and has occupied the top spot since last August. In 2020, Google also weakly beat T-Tok to the top of the list, followed by well-known websites such as Amazon, Facebook and Netflix.

The report also pointed out that T-Tok currently has more than 1 billion active users worldwide, and new features such as T-Tok's kitchen launched last year are popular with young users in the United States. Thanks to its strong insight and execution of young users' preferences, T-Tok creates a wave of growth dividends with almost every new feature and service upgrade.

What's even more frightening to Google is that the rise of short video apps is even changing the search habits of young Americans, gradually threatening its core search business.

Prabhakar, senior vice president of Google's Knowledge and Information Organization, at Fortune's Brainstorm Tech in July Raghavan is blunt to say that T-Tok is changing the way young people search. According to Google's internal data, about 40% of Gen Z are increasingly looking for Instagram and T-Tok, and some young people prefer to use Amazon's search function.

"We must admit that this number sounds somewhat shocking. New Internet users don't like to enter keywords to search for information, they prefer short videos as a more immersive way of searching. "

It is worth noting that the commercialization of T-Tok is still in its infancy, and the potential has not yet been fully released. Including Prabhakar Raghavan, including top Google executives, believe that the potential threat of T-Tok is greater than what is seen now.

Insider Intelligence's report shows T-Tok Ad revenue in 2022 will more than triple from last year, more than Snapchat and Twitter combined, and hit the dominance of Meta and Google.

In order to meet the challenge, Google is preparing for two things: on the one hand, it joins the short video track to face T-Tok head-on, and on the other hand, it actively explores new businesses and looks for a second pole of growth.

In September 2020, after India announced its ban on T-Tok, Google tested the waters by launching its local short-video app Shorts through YouTube. Shorts launched in the United States in March last year and has since expanded to more than 100 major countries and regions around the world.

At the same time, YouTube has also enriched the creator team by optimizing the creative incentive mechanism and spending a lot of money to grab people, such as the $100 million user incentive fund launched in May last year. Although Shorts' popularity and user volume cannot be compared with T-Tok, relying on YouTube's perfect business closed loop, the profit potential is still worth looking forward to.

On the contrary, in addition to the advertising business, the second growth point of Google's heart is still unclear.

Cloud computing, life sciences and autonomous driving, who can support Google's expectations?

Cloud computing , life sciences, autonomous driving, Google struggles to find a

In addition to advertising, the first business to be pushed to center stage by Google and most promising to become the second pole of growth is cloud computing.

According to the just-released Q2 financial report, Google Cloud achieved revenue of $6.28 billion, a year-on-year increase of 35.6%, far lower than the 53.9% in the same period last year. In Google's revenue map, this data can be said to be somewhat embarrassing.

On the one hand, cloud revenue is a low percentage, and progress has been slow for many years.

In the fourth quarter of 2020, Google announced cloud computing business revenue for the first time. In the quarter, Google Cloud's revenue was only $3.83 billion, less than 7% of the group's total revenue of $56.9 billion. In the second quarter of this year, Google Cloud's revenue accounted for only 9%, an increase of only 1.5 and 0.4 percentage points year-on-year. It can be said that the proportion of Google Cloud's revenue has not made much progress, and its contribution to the group is still limited.

On the other hand, similar to competitors such as AWS and Azure, Google Cloud has also fallen into the dilemma of losing money for years.

In the three years to 2020, Google's cloud business suffered a net loss of nearly $15 billion. In 2021, Google consciously compressed costs and tried to reduce the amount of losses in Google Cloud. Unfortunately, in the case of cutting personnel and sales-related expenses, Google Cloud's revenue growth rate has also been affected to a certain extent. Since the second quarter of last year, Google Cloud's year-on-year revenue growth has ushered in five consecutive declines, and the performance has not been as good as Wall Street's expectations.

To make matters worse, Google Cloud lags behind AWS and Azure. According to Canalys' report, by the end of last year, Google Cloud ranked third in the global basic cloud market, but its share was only 8%, while Amazon AWS and Microsoft Azure had a share of 32% and 21%, respectively.

Google Cloud, which started late and does not necessarily have advantages in technology, may be quite difficult to catch up with the previous two giants. As of 2021, Amazon AWS has been selected as a "cloud technology leader" by Gartners for 11 consecutive years. As the earliest Silicon Valley manufacturer to carry out cloud business, Amazon can be said to firmly occupy the dominance of the cloud computing market.

However, if you compare emerging businesses such as life technology and autonomous driving, cloud computing may still be Google's most anticipated new growth point - because the performance of these two businesses is more difficult to say.

The data shows that in the second quarter, the total revenue of other businesses, including the autonomous driving division Waymo and the life sciences division Verily, was only $193 million, but the loss was as high as $1.668 billion. According to Bloomberg, one of the reasons Google announced the suspension of hiring was to reduce investment in these marginal businesses.

Compared with cloud computing, autonomous driving and life sciences businesses are more expensive and have more uncertain commercialization prospects, which is destined to be a gamble for the future. In fact, Google's attitude toward both businesses has changed over the past few years, and it hasn't been as generous as it used to be.

At the time of its restructuring in 2015, Google's life sciences business retained three subsidiaries, Calico, Verily and DeepMind, focusing on anti-aging, healthcare and artificial intelligence, respectively. But now, DeepMind has fled, Calico's research and development scale has gradually shrunk, and Verily has become the only protagonist. Waymo, a self-driving business, has long been independently financing, trying to slowly wean itself off its dependence on Google.

It may be said that the overly strong performance of the advertising business masks the old problem of Google's relatively single revenue structure and lack of a second growth point. Now that the advertising market is down, a potential crisis is beginning to emerge, Google can no longer sit back and relax. Whether it's betting on cloud computing, continuing to tinker with life sciences, autonomous driving or even exploring other new businesses, it's time to act now.

written at the end

After entering 2022, the Internet winter has spread from emerging markets to Silicon Valley, and recruitment and layoffs have become common measures of many large manufacturers.

On July 12, Microsoft announced that it would lay off less than 1% of its employees worldwide, mainly due to the realignment of the positioning and development strategies of various business units after the end of the fiscal year ending June 30 this year; On July 25, the news that Apple plans to slow down recruitment spread, and some team recruitment quotas were frozen, but there were no further layoffs for the time being; Just a day later, foreign media broke the news that Meta was ready to lay off employees, and the proportion of employees laid off could reach up to 10%, and as early as May this year, some departments of Meta reported the suspension of recruitment....

Google, the protagonist of this article, is also not much better. According to the Wall Street Journal, Google CEO Sundar Pichai announced its decision to slow hiring for the rest of the year by internal email earlier this month, signaling Google's recalibration, a pause in external expansion.

"In some cases, we need to pause deployments and refocus resources to higher priority areas."

In the past two years, it is not uncommon for the Internet industry to bid farewell to the golden age. Today, Silicon Valley, the heart of the global Internet, is mired in a turbulent situation of layoffs and job cuts, which seems to be enough to show that the above arguments are not unfounded.

There's no doubt that the days of lying down to make money are running away, and internet/tech giants need to adjust their development strategies and regroup. Meta bet on the meta-universe, Amazon is deeply engaged in cloud computing, Microsoft drives away anxiety through B-side digital services, and Apple is also actively exploring new businesses such as car manufacturing. Google's new business and new endeavors are not few, but the most important thing now is to find a focus and establish itself as a second pole of growth.

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