The strong results underscored how the pandemic has turbocharged the company’s core advertising business. With retail foot traffic dwindling, marketers turned to Google to promote their products, delivering in a single year the kind of quarterly sales growth that the search giant typically records over a two-year span.
Alphabet said Tuesday that revenue rose 41% to $65.12 billion, its largest in 14 years. It posted a profit of $21.03 billion, nearly three times what it reported before the pandemic.
The red-hot digital-ad market has accelerated this year, with global spending on track to grow 26%, up from earlier projections of 15%, according to GroupM, a media-buying firm. Much of that windfall has flowed to Google, which has a dominant share of world-wide internet searches, digital navigation and online video viewership.
The company’s ad business, led by Search, Maps and YouTube, posted $53.13 billion in sales from advertising, a 43% increase.
Google said its profit for the quarter benefited from an accounting change related to depreciation of its servers and network equipment, which increased net income $460 million.
Google said its profit for the quarter benefited from an accounting change related to depreciation of its servers and network equipment, which increased net income $460 million.
Much of the company’s growth has come from e-commerce advertisers eager to reach customers whose product searches begin online. The company joined with
Shopify Inc.
this year to simplify search listings and ad purchases for 1.7 million merchants. The effort, which aimed to enliven its e-commerce segment, has helped turn retail ads into Google’s largest growth contributor.
In recent months, the search giant’s retail-ad segment has benefited from the new privacy policy
Apple Inc.
rolled out. Since April, the iPhone maker has required apps to ask users whether they want to be tracked. The changes have weakened the performance of ads on
Facebook Inc.
and
Snap Inc.,
according to ad buyers and smaller businesses. Many brands have shifted spending to Google as a result.
“In the land of the blind, the one-eyed man is king,” said
Brian Wieser,
GroupM’s global president of business intelligence. “Whatever data they have [at Google] is better than what most others have.”
YouTube has been another major driver of Google’s advertising gains. The video behemoth reported sales grew 43% to $7.21 billion in the quarter.
The business is on track to generate nearly as much revenue this year as
Netflix Inc.,
a subscription business valued at nearly $300 billion. The revenue fell short of Wall Street expectations and contributed to Google’s shares declining about 1% in after hours to $2,761.01.
Google finance chief
Ruth Porat
said that the Apple changes had a “modest effect” on YouTube’s revenue but didn’t elaborate further. The company relies on data from iPhones and iPads to target and measure some inventory it sells.
Regulators and lawmakers present perhaps the biggest challenge to Google’s continued business success. Last week, Texas and more than a dozen state attorneys general filed an unredacted version of an earlier antitrust complaint against Google. They highlighted how the company takes a 22% to 42% cut of ad spending that goes through its system, two to four times as much as competing ad exchanges.
Google also faces antitrust suits from the Justice Department and a separate coalition of states, alleging that the company has struck secretive agreements to favor its search engine and advertising businesses and thwart competitors. In July, a third coalition of states led by Utah filed a lawsuit targeting Google Play, the company’s app store.
Google has called the lawsuits flawed and said it collects lower fees for ads than the industry average. In reference to the app-store suit, the company said its open operating system lets customers download apps directly from developers’ websites.
The company already has made changes to its business that address some regulatory criticism. Last week, it reduced its cut of app-subscription fees to 15% from 30%, a move that analysts expect to cut into total revenue next year.
Investors have largely discounted such changes, so long as Google’s core search business remains strong. Alphabet shares have risen nearly 60% this year through Monday’s close.
“The hardest challenge for Google, alongside managing regulatory animus, is the law of large numbers,” said analyst
Richard Kramer,
founder of London-based advisory firm Arete Research. In the absence of competitive threats, he said the question is: “How do they sustain growth when 10% growth means finding another $10 billion in revenue?”
New bets for Google have yet to show that kind of potential. Nearly a decade after it began developing driverless cars, the tech giant’s Waymo subsidiary has yet to charge riders at scale. Its Verily Life Sciences unit, which conducts health research, hasn’t generated the kind of transformational sales it would need.
Google’s cloud-computing business has shown the most promise. After investing heavily over the past few years, the division has begun to gain market share behind leaders
Amazon.com Inc.
and
Microsoft Corp.
, which account for 41% and 20% of the market, respectively.
Google, which lags behind with 6% share, reported that cloud sales rose 45% to $4.99 billion in the period. The sales revenue fell short of Wall Street projections for $5.19 billion in revenue, and the company reported an operating loss of $644 million for the unit, which analysts said contributed to investors selling shares in after hours trading.
The company said it expects growth in the next quarter to come from its release of Fitbit products and Pixel phones, as well as subscriptions to YouTube.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
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