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Text | Mao Ting from Caihua News Agency

The global search giant Google (GOOG.US) reported better-than-expected results in the second quarter of 2024, and Google Cloud reached a milestone. However, secondary market investors were not impressed, and Google's Class A and Class C shares fell in pre-market trading on July 24.

So, what bad news did Google's second-quarter earnings report convey to investors? At the same time, what does Google's management think of future development trends?

01Overall performance: lackluster

In the second quarter of 2024, Google's (GOOGL.US) quarterly revenue increased by 13.59% year-on-year to US$84.742 billion; operating profit increased by 25.58% year-on-year to US$27.425 billion, and operating profit margin increased by 3.09 percentage points year-on-year to 32.36%; quarterly net profit increased by 28.59% year-on-year to US$23.619 billion, and net profit margin increased by 3.25 percentage points year-on-year to 27.87%.

As shown in the figure below, although Google's quarterly revenue has not yet surpassed the fourth quarter of last year, its operating profit margin has been greatly improved and is higher than the high of 32.30% in the second half of 2021 when its advertising business grew strongly.

In the first half of 2024, Google distributed a total of $2.466 billion in cash dividends and repurchased $31.38 billion in shares. If the repurchase amount in the second half of 2023 is included, Google may have returned a total of $65.824 billion to investors. Its current Class C stock market value is $2.27 trillion and its Class A stock market value is $225 million, which is approximately equivalent to 2.9% of its market value. On July 23, 2024, Google declared another cash dividend of $0.20 per share.

There are several key points worth noting in Google's latest quarterly results: 1) YouTube's advertising revenue growth was lower than expected; 2) the continued development of AI; 3) Google Cloud's breakthrough performance; and 4) increased investment in Waymo.

02 Business segments: Advertising takes the lead, YouTube lags behind

Currently, advertising revenue remains Google's main source of income and profit.

In the second quarter of 2024, Google's search and other business revenue increased by 13.80% year-on-year to US$48.509 billion, accounting for 57.2% of Google's total revenue.

Management revealed that the growth was mainly driven by the increase in demand for retail verticals and financial services.

As one of the world's largest social video platforms, YouTube's advertising revenue increased by 13.02% year-on-year to US$8.663 billion, lower than the market expectation of US$8.93 billion. The market believes that this means that competition from TikTok is intensifying. Traffic acquisition costs increased by 6.76% year-on-year to US$13.384 billion. Caihua estimates that the ratio of traffic acquisition costs to its advertising revenue has improved from 21.56% in the same period last year to 20.71%.

Although Google's advertising revenue is still growing at double-digit rates, the growth rate may have slowed down. Quarterly advertising revenue, including search, YouTube and online advertising, increased 11.13% year-on-year to US$64.616 billion, lower than the 13.04% in the previous quarter.

Google's advertising revenue plus Google's total service revenue including subscriptions, platforms and devices was US$73.928 billion in the second quarter of 2024, an increase of 11.53% year-on-year; the segment's operating profit was US$29.674 billion, an increase of 26.52% year-on-year, which is Google's main source of profit, offsetting the losses of other businesses. The quarterly operating profit margin increased further to 40.14% from 35.38% in the same period last year and 39.63% in the previous quarter.

Google expects to see growth in advertising revenue in the second half of 2024, partly from retailers in the Asia-Pacific region. In terms of subscriptions, platforms, and devices, the subscription business will see strong growth, but the year-on-year growth rate has declined continuously due to the price increase of YouTube TV in the second quarter of last year, and this impact will continue for the rest of this year.

03 Future Driving Force: AI and Google Cloud

Google Cloud's second-quarter 2024 results were impressive: quarterly revenue exceeded $10 billion for the first time, while quarterly operating profit exceeded $1 billion for the first time.

On the eve of Google's second-quarter earnings announcement, Wiz, a startup hailed as a competitor to OpenAI, rejected Google's $23 billion acquisition proposal and plans to seek a listing, which is Google's largest acquisition plan in history.

Despite this, Google has not stopped its development of AI.

At the earnings conference, Google management revealed some progress in AI and Google Cloud.

So far this year, its AI infrastructure and generative AI solutions for cloud customers have generated billions in revenue and attracted more than 200 developers.

Google believes that its leadership in search and infrastructure allows it to follow internal strategies and empower product teams to respond quickly. Combined with its expertise in model building, the company is well positioned to control future development as technology continues to evolve.

Google says it is innovating at every layer of the AI ​​stack, from chips to agents and more. That’s a huge advantage, and one the company believes will keep it at the top for the long term.

The company revealed that more than 1.5 million developers now use Gemini, and it recently launched new models that are more powerful and efficient than ever before. Gemini now comes in four sizes, each designed for specialized use cases.

With 2 million tokens, Google is able to offer the longest text window of all current large models, providing developers with use cases that other models cannot handle. Gemini is available to six current products with more than 2 billion monthly active users.

Google mentioned its Astra project, a multimodal conversational AI project launched by the Google AI team that can understand and generate text, while also processing images, videos and even music, breaking the limitations of traditional text communication. Google has been committed to building a general agent, which is a prototype to see what kind of help it can bring to people's daily lives.

In Q2, Google announced its first data center and cloud region in Malaysia, as well as expansion projects in Iowa, Virginia, and Ohio.

It is worth noting that TPU is also a major investment by Google in the field of AI. Its customized sixth-generation AI accelerator Trillium is said to be Google's best-performing and most energy-efficient TPU. Compared with TPU v5e, the peak computing performance of each chip has increased by nearly 5 times and the energy efficiency has increased by 67%.

The latest Nvidia (NVDA.US) Blackwell platform will come to Google Cloud in early 2025. Google said it will continue to invest in designing and building powerful and efficient infrastructure to support its efforts in artificial intelligence. However, the first step is to allocate resources to create production capacity.

Regarding Google Cloud, Google said that it had acquired major customers such as Hitachi, Motorola Mobile and KPMG during the period.

In addition, Google's in-depth cooperation with Oracle (ORCL.US) has greatly expanded the cooperative products for their huge customer base. The strong development of Google Cloud is mainly driven by the construction of AI infrastructure. For example, Google provides leading models and high-performance computing applications for artificial intelligence startups such as Essential AI.

Since launching Cloud Next, Google has continued to drive radical differentiation, including Trillium, and the A3 Mega, powered by NVIDIA H100 GPUs, which has twice the network bandwidth of the A3.

Management said Google incorporated AI into its security portfolio in the second quarter, helping TELUS strengthen its proactive security posture.

04Creating a new growth curve: autonomous driving

At the earnings conference, management stated that it will continue to focus on improving overall efficiency and long-term returns on investment, and will launch a $5 billion investment plan for Waymo, which may be carried out over several years.

Interestingly, General Motors (GM.US), which announced its quarterly results on the same day, revealed that due to regulatory issues, the company's autonomous driving division Cruise will indefinitely delay the production of the autonomous shuttle Origin and instead focus its roadmap on the next-generation autonomous car, the Chevrolet Bolt electric car.

At the same time, Tesla (TSLA.US) has previously revealed that the launch of its driverless taxi CyberCab will be delayed from August to October.

However, the traffic data of the driverless taxi Luobokuaipao launched by Baidu (BIDU.US), Google's search engine peer, is climbing.

At this critical juncture, Google has increased its investment in Waymo, which may show Google's determination to excel in the field of driverless cars.

According to foreign media data, Waymo received $2.25 billion and $750 million in Series D financing in March and May 2020, respectively, with major investors including Silver Lake Capital, T. Rowe Price Group, Fidelity Investments, etc. In June 2021, it received $2.5 billion in Series E financing, led by Silicon Valley's top venture capital firm a16z.

According to Crunchbase data, Waymo's current valuation may be $30 billion, the same as that of Cruise, the autonomous driving division of General Motors. It will be worth paying attention to whether Waymoz can stand out in the upcoming driverless war.