Google's Latest Quarter
In this issue of the peel:
Market Snapshot
Banana Bits
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Macro Monkey Says
American Showoff
Remember that kid in school who invariably got straight As but worried aloud that they did terribly when test results came out?
Yeah, we all hated that kid.
But that’s essentially how Europe views the U.S. anytime we worry about economic slowdowns or contractions.
This discrepancy came into crystal-clear view with the release of the latest S&P Global Manufacturing reports. Let’s get into it.
What Happened?
Despite some imperfections, the U.S. has put on a masterclass of economic recovery in the post-pandemic period.
Carried by services, the U.S.’s latest Purchasing Manager’s Index (PMI) from S&P Global came in strong at 55.0, an increase from June’s 54.8.
As a reminder, any reading above 50 indicates expansion, while below 50 indicates contraction. So, July’s reading suggests an even more rapid expansion than the prior month.
With that said, manufacturing alone fell into contraction territory, declining to 49.5 in July from 51.6 in June.
New orders, inventories, and production all declined, contributing to July’s precipitous fall. Employment still grew, but at a much slower rate, all contributing to a spike in concern on the outlook for U.S. manufacturing.
Despite July’s contraction in manufacturing, the composite reading of 55.0 clocked in as the highest since April 2022.
Services PMI led the way at 56.0, the highest since March 2022. Input prices, still largely driven by employment cost increases, contributed the most to July’s increase.
Compared with data from across the pond, however, countries like Germany would kill for the contraction registered by the U.S.
Germany is like the California or Texas of the Eurozone—the region’s manufacturing powerhouse. Last month, German output declined for the first time in four months, contributing most heavily to the region’s slowdown.
Like a water-fearing dog attempting to swim, the Eurozone’s total PMI clocked in at 50.1 this month from 50.9 in June, barely staying above water.
Data from France, the region’s second-largest manufacturer, didn’t help much either but did move in the right direction.
Declines in factory production contributed most to the declines. In fact, looking at the Eurozone’s output PMI alone, we find that this reading contracted for the 16th month in a row, doing so at the fastest pace since December 2023.
The Takeaway?
Although magnitudes vary, both sides of the Atlantic are largely experiencing similar trends.
The services sector remains relatively robust, primarily elevated by prices. While that’s not ideal, it does suggest that service demand remains elevated, reflecting positively on macro conditions.
Declines in manufacturing, meanwhile, certainly signal cause for concern. A rebalancing of spending away from durable goods and discretionary items like clothing is likely the primary driver, suggesting that consumers are nervous about a slowdown on the horizon.
With the Olympic games set to begin in Paris tomorrow, France and the Eurozone region will get a boost from increased spending around the games.
But the U.S. has already won gold in macro performance. And, according to all the drunkenly-placed bets I made on the games last night, there’s plenty more gold to come over the next few weeks.
What's Ripe
Enphase Energy (ENPH) 12.8%
AT&T (T) 5.2%
What's Rotten
Big Tech (MAGS) 6.1%
Lamb Weston (LW) 28.2%
Thought Banana
Earnings Spotlight: Alphabet Inc (GOOGL, 5.04%)
In his poignantly luminous 1999 literary masterpiece “Still Don’t Give a F*ck,” artist Eminem famously stated, “I can’t rap anymore, I just murdered the Alphabet.”
Yesterday, the market joined him as an accomplice in that murder.
Together with Tesla, the firms have mired Big Tech’s Q2 earnings in losses early on this earnings szn. Let’s see how bad it was.
The Numbers
Google’s parent company delivered earnings of $1.89/sh on total revenue of $84.74bn against estimates for $1.84/sh on $84.19bn.
The tech giant beat on all key operating metrics… except for one.
Google Cloud revenue beat by 1.5%, and Traffic Acquisitions Costs did similarly, beating by 1.1%. However, YouTube ad revenue of $8.66bn vs estimates for $8.93bn was the primary contributor to Wednesday’s selloff.
Total revenue growth was solid, along with most key segments, particularly Google Cloud revenues. However, the miss in YouTube and declines in Google Network are causing concern among analysts that marketing budgets are getting slashed.
When entering slowdowns, marketing spend is one of the easiest to cut. So, if a recession is commonly viewed as on the horizon, CMOs will pull ad dollars.
It seems like this could be driving the weaker-than-expected performance and declines in some business units.
However, the surge in Other Bets growth driven by healthcare and internet services through Verily and Google Fiber is promising for long-term revenue diversification and, ideally, growth.
Speaking of Other Bets, Google’s effective in-house venture unit, the company plans to pour another $5bn into Waymo this year in hopes of catching up with Tesla’s FSD.
The Takeaway?
If Google’s ad business is falling victim to a potential economic slowdown, I can’t imagine what’s happening at smaller ad-driven businesses.
Snapchat, Pinterest, Trade Desk, and others all report in the coming weeks. We’ll find out then if this is a Google problem, an industry problem, or (probably) an economy-wide problem.
Stay tuned.
The Big Question: Is Google’s ad business suffering under a pending recession? When will any “Other Bets” investments meaningfully contribute to total revenue?
Banana Brain Teaser
Previous
If a two-digit positive integer has its digits reversed, the resulting integer differs from the original by 27. By how much do the two digits differ?
Answer: 3
Today
Xavier, Yvonne, and Zelda each try independently to solve a problem. If their individual probabilities for success are 1/4, 1/2, and 5/8, respectively, what is the probability that Xavier and Yvonne, but not Zelda, will solve the problem?
Send your guesses to [email protected]
?
Having been trained as a computer scientist in the '90s, everybody knew that AI didn't work. People tried it. They tried neural nets, and none of it worked.
Sergey Brin
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David, Vyom, Jasper & Patrick