Hey Google, whatever happened to revenue growth?

Analysts now expect Alphabet’s revenues to grow just 16% this year and 13% next year, slowing to 10% growth in 2021. That compares with 23.4% growth last year. Social media giant Facebook’s revenues grew 35% last year and are forecast to grow 26% this year, while some of the cloud-centric software-as-a-service firms such as Service-Now, Workday and PagerDuty are growing at over 40% annually. On average, component firms of Standard & Poor’s 500 are growing revenues at a 6% annual clip, a pace that is likely to be maintained for a while, given the low US unemployment levels and robust consumption.

Here’s what you need to understand about Alphabet, the global data powerhouse. Every 60 seconds, Google searches four million queries and 4.5 million YouTube videos are watched around the world. Google just soaks up all sorts of data — anything you search on the internet or, if you are an Android phone or watch user, it keeps tabs on who you call, who your friends or contacts are, and monitors every step you take, whether it is a stroll in the park, a marathon or pacing the living room. If you use the Google Home speaker, it even knows what time you go to bed and what time you wake up and indeed listens to every conversation in the room, not just what you utter after saying “Hey Google”. If you use a Chrome browser or Gmail or Google Maps, or save any file on Google Drive, or buy apps, games, movies, music, books, magazines on Google Play, or watch free YouTube videos or subscribe to one of YouTube’s paid services, you are handing over more of your personal data to Google that will soon be monetised.

The key to Google’s business model is not just how much of your personal data and that of your friends, family or contacts it is able to extract, but just how good it is at juicing every last drop of it, or how efficient it is in the way it harvests, slices and dices that data and then sells and resells the same to a multitude of advertisers and marketers so that they can reach precisely targeted audiences.

Why, then, is revenue growth slowing? For one thing, after years of heady growth, the law of large numbers has finally caught up. For another, search is no longer restricted to browsers. I use voice assistants Alexa on my Amazon Echo and Siri on my iPhone and Mac to search as often as I use search engines such as Google on my browser. Moreover, e-commerce behemoth Amazon has emerged as a serious challenger in online advertising, aggressively taking market share from Google, Facebook, Twitter and others. If you want to buy something, why would you search it first on Google, then buy it elsewhere? Increasingly, shoppers are going directly to the Amazon site and big advertisers are turning to companies that can “close the loop” between advertising and commerce.

But just as Amazon has been encroaching on Google’s turf, Google has been nibbling in the cloud infrastructure arena, the e-commerce behemoth’s most profitable business, where Amazon Web Services leases computing power and data storage space to business customers through remote internet- connected, number-crunching computers and servers. Yet, after years on a spending spree, Google Cloud remains a bit player in the cloud arena, way behind AWS and the No 2 player, Microsoft.

You are the product

Because harvesting of your personal data makes you the main product for Google, it generated US$110 billion in revenues last year. That is 10% more than the revenues of Boeing, the world’s largest aeroplane maker, which racked up US$101 billion in revenues in 2018. A burgeoning cash pile has helped make Alphabet the world’s largest private R&D investor. Since its IPO in 2004, it has invested a cumulative US$120 billion in R&D and buying up or taking stakes in companies that are making audacious bets on future technology.

The internet powerhouse is expanding through acquisitions such as DeepMind Technologies, a British artificial intelligence (AI) firm that it bought five years ago. Google also owns Calico, a life sciences firm seeking to extend longevity, and Waymo, the pioneering self-driving car firm that is testing robotaxis in Phoenix, Arizona. Waymo recently signed a partnership deal with ride-sharing firm Lyft to use its platform. “Waymo needs Lyft’s ride-sharing platform to launch its robotaxis and Lyft needs autonomous vehicles from Waymo to help bring its costs down,” says Pierre Ferragu, tech hardware analyst at New Street Research in New York.

Alphabet recently became the first firm certified by regulators to deliver goods by drones in the US. It is also building smart cities such as its redevelopment of 12 acres of southeastern waterfront land in Toronto, through its subsidiary Sidewalk Labs. The data- centric city is likely to eventually encompass the entire 800-acre waterfront area of Toronto. Alphabet has funded “moonshot” projects in an array of fields, including AI and robotics, computational neuroscience, healthcare and biotechnology — from contact lenses for diabetics that measure glucose levels in tears to Project Loon, which aims to bring internet access to the masses by creating an internet network of balloons flying through the stratosphere. WiFi from balloons in the sky will be launched in Kenya next year.

Google also sells consumer hardware, including Pixel smartphones, as well as connected home products such as Nest thermostats, smoke detectors, doorbells and home surveillance cameras. Google needs to be in the hardware business because Apple, Samsung Electronics and an array of electronic hardware makers are either increasingly reluctant to hand over data to Google or want to charge for it. That is one reason Google’s traffic acquisition costs have ballooned in recent years. Alphabet pays US$11.5 billion just to Apple alone every year to put Google as the preferred search engine on iPhones and iPads, which in turn allows it to gather search-related data from Apple users.

Alphabet’s biggest asset is its growing hoard of cash. Google’s owner had US$109 billion in net cash at end-March, compared with US$113 billion in net cash that Apple currently has on its balance sheet. Sometime in the current quarter, Alphabet will overtake Apple to become the company with the world’s largest pile of cash. (Apple buys back US$20 billion worth of shares and pays out US$3.4 billion in dividends each quarter. Alphabet buys back an average US$3 billion in shares every quarter, or about the same amount it spends on stock-based compensation every three months, keeping its total share count unchanged.)

Is Alphabet a Buffett stock?

Some analysts believe Alphabet’s cash hoard and lower valuation will help attract bigname value investors. Charlie Munger, Berkshire Hathaway’s nonagenarian vice-chairman, said recently not buying Google’s owner when it was cheap was a mistake. “We just sat there sucking our thumbs,” he told a shareholders’ meeting on May 4. “We are ashamed. We screwed up.” Google’s founders Sergey Brin and Larry Page had approached Berkshire with an investment prospectus weeks before the IPO in 2004, but chairman Warren Buffett conceded in an interview a few years ago, “I blew it”. Based on Google’s split-adjusted IPO price of US$42.50, Berkshire could have made a near 28-fold gain if it had bought the stock at the IPO. (Buffett and Munger also famously missed tech titans Apple and Amazon.com, though they have been trying to make up for it. Berkshire’s Apple investments, for example, are up nearly US$12 billion, not counting dividends, and the Oracle of Omaha two weeks ago revealed that Berkshire recently bought Amazon shares.)

Alphabet shares currently trade at 26.3 times this year’s forecast earnings compared with 16.5 times forward earnings for the S&P 500. By year-end, Alphabet is forecast to have nearly US$124 billion in net cash if it does not buy back any more shares. With growth slowing, more likely than not, it will soon start paying a small dividend and boost its share buyback programme. Nothing endears a stock to Buffett and Munger more than a steady and growing stream of dividends and a promise to buy back more stock.

Of course, Alphabet can always use its cash hoard to buy growth. Among the targets that have been talked about are data analytic plays such as Tableau Software or Splunk Technology, which will help boost its cloud services capabilities so it can more effectively compete with AWS and Microsoft. Another potential merger target being bandied about by analysts is Veeva Systems, a key player in healthcare analytics.

The elephant in the room for data harvesters such as Alphabet is government regulation as concerns mount that too much of our personal data is being sucked in without our permission, reaping billions for its shareholders. Tech giants’ biggest fear is that some day they too might be disrupted by the next new start-up. Yet, more regulation will actually be good for Google or Facebook, as it would dramatically raise compliance costs and barriers to entry. Little wonder, then, that those that have made billions from harvesting our data are the biggest cheerleaders of regulation. “Legislation will help us work towards ensuring that privacy protections are available to more people around the world,” Google CEO Sundar Pichai said in an op-ed in the New York Times on May 7. Google has paid US$9.3 billion in fines in Europe since 2016, although those are seen as just a slap on the wrist. Another big threat is the breakup of large tech companies such as Alphabet and Facebook. Over the long run, though, that too will be good for the majority shareholders of the tech giants.

With its cash pile and irons in the fire with other “moonshot” bets, Alphabet, whose stated mission is to “organise the world’s information and make it universally accessible and useful”, seems well positioned.

“Organising the world’s information was relatively easy when that information was widely available and easy to monetise,” argues tech strategist Ben Thompson of Stratechery. “The future, though, is a lot messier: Getting information is more difficult, presenting that information is more challenging, and making money is very much an open question,” he notes. Alphabet clearly has its work cut out.

Assif Shameen is a technology writer based in North America

This story appears in The Edge Singapore (Issue 882, week of May 20) which is on sale now. Subscribe here