Google Cloud and YouTube Help Protect Alphabet From a Coronavirus Disaster

Some investors have criticized Alphabet (GOOGL -1.23%) (GOOG -1.10%) for being the least diversified among the tech titans. Microsoft has its software, cloud, and hardware empire; Apple practically prints money-making devices and has a burgeoning services segment riding sidecar; and Amazon.com has e-commerce cornered, plus the lead in cloud, and a myriad of other services. But Alphabet has ads, most of which are derived from Google. Sure, it has Google Cloud and YouTube, but the assumption was they were insignificant factors.

Turns out that's far from the case. The company started breaking down its results to show Cloud and YouTube during its final report from 2019, and it continued to shed light on its highest-growth businesses to kick off 2020. The ad business took an unsurprising hit due to coronavirus lockdowns, but things weren't as bad as they could have been.

Image source: Getty Images.

Google Cloud and YouTube to the rescue

Alphabet CEO Sundar Pichai kicked off the quarterly update on Tuesday with some comments regarding the crisis, noting this is the first time a pandemic (and resulting recession) has taken place in a digital-first world. Though many businesses are taking a serious beating due to shelter-in-place and work-from-home orders, other areas of the economy are proving resilient even as social behaviors get disrupted -- perhaps permanently.

Ad revenue grew year over year through February before declining to a mid-teens percentage rate after the lockdown was put in place in mid-March. However, Google Cloud saw another massive increase in sales as businesses scrambled to put continuity plans in place to keep operations running, and to pace surges in web and internal network traffic. Pichai rattled off a long list of organizations Google Cloud is helping, from the State of New York to e-commerce powerhouse Shopify to AT&T. Cloud is helping many companies transform their processes, but many others have been using Google's G Suite of cloud-based tools for a long time. The subscription service now boasts over 6 million paying customers.  

YouTube did pretty well, too, and while ads on the platform reversed course late in the quarter, annual growth merely decelerated to a high-single-digit percentage rate in March. And the "other" segment notched big gains, driven by YouTube's new subscribers (like TV and Music) and higher usage of the Play app store. The "other bets" investment portfolio was a drain on the bottom line, but progress was made on that front as well. The Waymo autonomous vehicle business raised $2.25 billion in its first outside investment raise, and Wing autonomous delivery saw traffic rise by five times thanks to test programs in Virginia and Australia.  

All told, the Alphabet family did pretty well considering the dark clouds hanging over.

Data source: Alphabet.

Google ads are down, but certainly not out

But what of the primary driver, Google search and resulting ads? Expect a rough Q2 report card as the bulk of COVID-19 disruption is going to show up during that period. Pichai and CFO Ruth Porat weren't ready to expound on specific numbers Google is seeing in April, but it may not be as ugly as some investors had feared. Pichai expounded:

The good thing about Search Ads and direct response on YouTube as well, but Search primarily, is that it's an extraordinarily effective system. It's a transparent system. [Advertisers] have a very clear sense of [return on investment]. It's very measurable, highly cost effective. And so we have always seen -- and we saw this in 2008 as well -- people respond in the short-term, but the recovery is also fast when it comes back.  

The flexibility to quickly turn Google search ads off and on, and the cost-effectiveness of running those ad campaigns, thus means a quick rebound in results is likely in store once things begin to normalize. Plus, digital advertising is still on a long road to becoming the dominant and preferred method of advertising around the globe. Coronavirus is certainly going to be a speed bump, maybe a big one, but Google search and ads business is still in growth mode.

But the real deal sweetener is that Google is quickly becoming a diversified high-growth company, with multiple levers to pull to propel its results higher. The tech giant remains a portfolio staple in my book.