Breaking Down The Google Financials For 2021 [Hint: A Behemoth Growing At The Pace of Start Up]

Google’s parent company, Alphabet, released its end-of-year financials. Looking at its financials is important for various reasons and some of them are:

• Assessing the digital?advertising landscape.
• Understanding how?Google’s advertising machine works at scale.
• How consumers’ behavior is shifting in this new?digital?landscape.

Let’s dive into them.

Google’s profitability

Google’s profitability has slightly improved in 2021, thanks to the fact it managed to increase its?revenue faster than it increased its operational costs, as traffic on its platforms increased substantially during 2020-2021. We’ll see in this in-depth?analysis?why that’s the case.

First of all, for the first time in its history,?Google?generated over $257 billion in revenues. And the company almost reached a two trillion market capitalization. For some context, when?Google IPOed in 2004, it recorded almost a billion in revenues, and it was worth about $23 billion, as it popped at its IPO date to $85 per share (On February 2nd, 2022, a?Google stock is worth $2,958.22).

At the time, in 2004,?Google had just managed to scale its advertising machine comprised mainly of?Google AdWords (today?Gogoel?Ads) and?Google?AdSense. At the time the advertising machine was primarily based on Internet traffic from desktop devices. That was a completely different world.

As we’ll see throughout this?analysis, today most traffic comes from mobile. And?Google’s mobile ads platforms (Google AdMob) play a key role. So let’s dive a bit into the main?financial?segments of?Google.

Google’s main segments in 2021

In 2021, the?Google?advertising machine-generated over $209 billion in revenues. This represented an over 42%?growth, year over year! This is a massive improvement for a company worth almost two trillion. In a market landscape that is not anymore in favor of?digital advertising. How did?Google pull this off?

We’ll see this shortly. But for now, let’s emphasize a few key points.

Today the?Google?advertising machine is comprised of three main products:

• Google Search/Properties: This represents the set of products that?Google?owns, from the search engines to all the other vertical platforms that the company operates (Google Discover,?Google?News,?Google?Travel, and more). In 2021, this segment generated over $148 billion!
• YouTube: This is of course one of the most successful?business?acquisitions ever done. It was acquired by?Google?for $1.65 billion in 2006. It’s important to notice that?Google?was able to integrate YouTube and scale it up. A feat that not every other company would have been able to achieve. At the time YouTube was getting sued for various copyright infringements (the?platform?is comprised of user-generated content, often posting copyrighted materials) that would have most probably bankrupted it if it had stayed a startup without Google’s backing. By 2021, YouTube has become an advertising machine generating over $28 billion (this doesn’t count the YouTube memberships, which are reported separately).
• And Google Network Members’ properties:?this is the set of publishers that decide to opt into Google’s advertising?network?(either AdSense for desktop, or AdMob for in-app advertising). Here Google shows advertising on the?network?members’ properties, thus splitting the revenues with them. In 2021, Google’s?network members generated over $31 billion of revenues.

As we’ll see understanding the difference among these segments helps us understand how Google manages its cost structure for each segment.

What determines the?growth?of each segment?

• Google’s search advertising has been driven by?growth?in search queries.?In fact, since the pandemic hit, more and more users started to use Google’s products. This trend has continued. However, most of it was driven by mobile users’?growth. This is an important aspect, as it shows that Google’s main driver of?growth?is based on mobile traffic. This changes the way the company?needs?to prioritize its?product?developments efforts, its ad formats served to users, and also how it experiments.
• YouTube?growth was driven primarily by improved ad formats.?This means that Alphabet (as it’s evident to anyone going on YouTube) has ramped up the advertising operations on YouTube. In short, on YouTube now there are way more ads than before. This “improved ad formats” is the result of YouTube’s extreme stickiness with users, which enables Alphabet to play with its ad formats.
• Google’s?network?members’ properties were primarily driven by AdMob.?In short, the mobile advertising platform, powered up by Android devices through the Google Play store, was the main driver of?revenue?growth?in 2021. This shows how Google has shifted also its focus on the mobile advertising platform.

Let’s see how, a little bit more in detail, ad monetization changed for Google.

In 2021, two main factors determined the improvement in ad monetization by Google.

First, Google recorded an increase in paid clicks (driven by an increase in user adoption and search queries primarily on mobile devices).

Second, this also drove more paid clicks in AdMob through the Google Play store.

Third, as we saw Google is testing various ad formats (we can argue it’s showing more ads) both on Google’s products and YouTube, which slightly improved monetization.

Among the other revenues, instead, Google Cloud also recorded an important?growth?thanks to the Google Cloud Platform.

Let’s look now at the other side, the cost structure.

Google’s cost structure

When it comes to Google its cost structure is pretty straightforward. In order to keep its operations profitable, it?needs?to be able to generate traffic at much lower costs, than it can monetize it. In 2021, Google traffic acquisition costs (the spending needed to run the servers, for its main products, and the deals in place to enable the?distribution?for its main products) were over $45 billion.

In respect to advertising revenues, its traffic acquisition costs were 22% of its advertising revenues in 2020. In 2021, instead, the traffic acquisition costs decreased to 21.7% compared to its revenues. This might seem a small difference. Yet, Google managed to lower its traffic acquisition costs, nonetheless its much wider users’ adoption.

This shows that a lot of that adoption was organic, and based on strong deals the company has in place.

The other cost of revenues instead was mainly driven by improved content acquisition costs and costs in data centers.

In terms of profitability, it’s interesting to notice, how, at a wider scale, Google Services has huge margins. That’s because as we saw in the previous paragraph, Google managed to improve monetization for users, it saw mobile users’?growth, while it managed to lower its traffic acquisition costs!

This combination led to an improved marginality.

However, it’s also interesting to notice how the Google Advertising machine is the only one running at positive margins.

Where instead, both the Google Cloud?platform and the other Google Bets run at negative margins. Important to distinguish here.

The Google Cloud?platform is critical for the future success of the Google AI platform.

When it comes to the other bets those instead are breakthroughs that Alphabet is pursuing with a long-term perspective. Those are money-losing bets for now but might turn into something interesting in the coming decade.

Key highlights

• Google’s Alphabet has become a two trillion-dollar company in 2021. Back in the early 2000s, the company had started to build its advertising machine. This journey culminated in 2004 when the company had managed to put together the various pieces (Google AdWords and Google AdSense) of its advertising machine, thus scaling up its revenues on top of a growing search platform. Indeed, in 2004 Google generated almost a billion dollars in revenues, and it was worth about $23 billion as it IPOed. In 2021, the company passed the $257 billion mark!
• Among the biggest drivers of its revenues were the increased adoptions from users as the pandemic hit. This trend continues across 2020-2021. The increased search query traffic was primarily due to mobile users. Therefore, Google had to push more experimentations through its mobile platforms.
• YouTube, driven by mobile traffic?growth?saw also an important?growth. Alphabet here pushed through more ad formats, and more advertising to monetize it further. Thus, taking advantage of the increased mobile traffic as a consequence of the pandemic.
• The above led to increased profitability, given the ability of Alphabet to reduce/or keep its costs stable as traffic increased. And yet its ability to keep monetizing the traffic through increased ad spending, but also by serving more ads on its platforms.
• Google ads?platform remains the strongest segment of the company, with massive profitability.
• Google has negative margins on its Cloud Platform and its further bets. However, both play a critical role in the future (Google Cloud Platform in the next five years, while the other bets in the coming ten-fifteen years).