How Alphabet’s Business Grew in Q3
Effectively operating as a technology conglomerate, the top-line results do not tell us much. Instead, it is helpful to take a more in-depth look at how exactly the company is growing.
- Google Search. This segment reported $26.3 in the third quarter of 2020, up from $24.7 billion in the third quarter of 2020.
- YouTube Ads. Running ads on YouTube continues to deliver significant revenue growth. In Q3 2020, YouTube ads generated $5 billion in revenue, up from $3.8 billion in Q3 2019.
- Google Cloud. In contrast to the advertising business, Google Cloud is a much smaller business. The company earned $3.4 billion from the cloud in Q3 2020, up from $2.3 billion in Q3 2019.
Over 50% of Revenue from Outside the US
Alphabet earns the majority of its revenues from outside of the United States. In the first nine months of 2020, the company earned 47% of its revenue in the United States. In EMEA (Europe, Middle East, and Africa), the company earned 30% of its revenue.
Where Alphabet Lost $1 Billion
While online advertising from Google search and YouTune continue to produce revenues, Alphabet is exploring ideas. Collectively described as “Other Bets,” Alphabet allocates funds to new ventures. In Q3 2020, the Other Bets group reported $178 million in revenue and a loss of more than $1 billion.
The Other Bets segment includes Access (i.e., Google’s fiber Internet access group), Waymo (the self-driving car company), GV (i.e., a venture capital group in Google), and other efforts. As long as the company continues to earn billions from its core business, investors are likely to tolerate its experimentation.
Alphabet’s Hiring Spree Continues
While other companies are laying off staff, Alphabet continues to grow its workforce. In Q3 2020, the company had a total workforce of 132,121, an increase of 18,000 employees compared to last year. As of November 2, Google has more than 2,700 job openings.
Overall, Alphabet focused its hiring efforts on the Google Cloud division. Nonetheless, management notes that “Competition in our industry for qualified employees is intense” in an SEC filing. As a result, Alphabet compensation costs are likely to continue increasing over time.
R&D Spending Reaches $20 Billion
Alphabet continues to invest significant resources into research and development (R&D). In the first nine months of 2020, the company spent over $20 billion on R&D (i.e., 16.4% of revenue). In contrast, Microsoft spent 13% of its revenue on research and development. Google’s relatively high R&D spending level may help it maintain its highly complex products, including Google search.
Cash Reserves Grow by $1.7 Billion
Like other technology companies, Alphabet continues to grow its cash reserves steadily. In the first nine months of 2020, the company grew its cash balance to $20 billion. The growth in the company’s investment portfolio is even more striking.
Alphabet’s $111 Billion Investment Portfolio
Alphabet reported $111 billion in marketable securities on its balance sheet as of September 30. With these reserves, Alphabet could buy half of Coca Cola without touching its cash balance. The company’s large pool of cash gives management more flexibility to test new ideas. However, those new ideas may not produce immediate results.
Alphabet Keeps Rewarding Shareholders
Unlike Microsoft, Alphabet does not pay dividends. Nonetheless, management is continuing to reward shareholders. According to an SEC disclosure, “As of September 30, 2020, $25.5 billion [in Alphabet shares] remains available for repurchase.” By repurchasing millions of shares, Alphabet makes its remaining shares more valuable.
On a year to date basis, Alphabet stock has risen from $1,368 on January 2 to $1,616 at the end of October 2020.
Alphabet Takes Advantage of Low-Interest Rates
Despite the company’s large cash reserves, the company continues to borrow. In 2020, the company has raised $10 billion in debt. The interest rates on the notes range from 0.57%-2.33%. That is a lower interest rate than the company’s previous debt issues, which have an effective interest rate between 2.23%-3.73%.
Government Investigations Loom on the Horizon
In 2019, Alphabet paid over $1.6 billion in fines to the European Union. That may offer a hint of additional losses the company may suffer in 2020 and beyond. In October 2020, the government started a lawsuit against Google. Given Google’s substantial market share — 73% of US online advertising revenues in 2019 — defending against the anti-trust lawsuits may prove difficult.
About the Author
Bruce Harpham is an author and marketing consultant based in Canada. His first book "Project Managers At Work" shared real-world success lessons from NASA, Google, and other organizations. His articles have been published in CIO.com, InfoWorld, Canadian Business, and other organizations. Visit BruceHarpham.com for articles, interviews with tech leaders, and updates on future books.