Google’s “Uncertainty” Is Encouraging

Google’s “Uncertainty” Is Encouraging

I was nervous going into Google earnings. For the past month, I’ve been expecting cautionary September guidance from big tech, with Google and Microsoft results being the first real test. Google’s June quarter was essentially inline with expectations but a little light on YouTube revenue which, in my opinion, was more than offset by slight outperformance in search. As is the case with every quarterly report, the takeaway is embedded in the outlook. Google’s management chose to describe their outlook as “uncertain,” which is more bullish than it might sound.

Don’t fall into the trap

The trap in this environment is to view results more positively than they really are. Tech investors are at risk of falling into this given what they’ve been through in 2022. The answer to the question—were Google results positive or negative?—requires us to decode their outlook.

Google side-stepping the question is a positive

As for the September outlook, the company outlined three factors that they summed up as broader uncertainty: tough comps, FX headwinds and the macro. CFO Ruth Porat went on to say she’ll leave the modeling up to the analysts.

I believe that Google actually has high visibility on two of the three factors that they outlined: tough comps and FX. The third factor, the macro, is the definition of uncertainty. What caught my attention was when Mark Mahaney asked which verticals can we infer are weak. SVP & Chief Business Officer Philipp Schindler side-stepped the question, only saying there have been pullbacks on spending in YouTube and on the Google network by some advertisers in Q2. That was obvious given it was in the reported numbers.

It’s game theory, but I believe that Google’s business is doing just fine. It sounds like brand advertising is soft, and that’s why YouTube missed. That softness is more than offset by strength in search, which is gaining ad dollar market share. Management knows there’s little upside in saying things are stable, so they protect themselves with the “uncertainty” language in case things really tank. Then, if things do worsen, they can say—I told you so.

Google will still be the O₂ of the Internet

As an investor in Google, I breathed a sigh of relief after decoding the outlook. That doesn’t mean shares of $GOOGL are in the clear. The macro could, and maybe will, worsen. Even so, the company has shown when other businesses stumble—Walmart, Snap, GM, to name a few— Google marches on because they continue to be the oxygen of the internet.

Other Takeaways

  • Search. The most important metric, Search revenue, was slightly better than expected at $40.7B vs $40.3B. Search continues to innovate. The company continues to invest heavily in AI, with 8 mentions in the prepared remarks, especially related to AI-powered multisearch. Search is also a good barometer of consumer health, and was driven by travel (expected) and retail (surprising). 
  • YouTube Shorts. Management indicated that momentum in Shorts is “encouraging,” and passed on giving additional commentary in the Q&A. What jumped out at me is that the product got a call out on the prepared remarks. TikTok has competitors.
  • Profit CEO Sundar Pichai reiterated his comments from earlier this month that they will be slowing hiring, describing it as a more “disciplined” approach. This should have a positive impact on 2023 earnings. 

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