Dark days ahead for Alphabet, but revenue is okay for now

Google parent company Alphabet has announced its first-quarter earnings for 2020, and it appears the company is doing well for now. However, it is hunkering down for dark days ahead thanks to COVID-19.

The company is caught in an interesting crossroads during the COVID-19 pandemic. Internet usage is on a constant rise as more people are stuck at home, but consumer spending is plummeting as more than 26 million people file for unemployment. While services like YouTube are seeing record usage, most people don’t pay for the streaming service. Instead, it makes its revenue largely from ads, and with spending down, those ads aren’t as valuable as they once were. As a whole, though, the YouTube division saw a 33% jump in revenue to $4 billion, which is quite a positive.

According to Alphabet Chief Financial Officer Ruth Porat, “Performance was strong during the first two months of the quarter, but then in March we experienced a significant slowdown in ad revenues.”

In spite of the drop in ad revenue in March, the company saw total revenue of $41.2 billion, which is an increase of 13% compared to the same quarter in 2019. The company also generated a staggering $6.8 billion in profit. While that’s a lot of money, it’s an increase of only 1.5% over last year, which is less growth than expected.

Based on the sharp decline, analysts predict that this will continue, meaning Google could see far worse numbers in the coming months. On the earnings call, Porat said, “We anticipate that the second quarter will be a difficult one for our advertising business.”

Google’s “other revenue” section, which includes YouTube subscriptions, YouTube TV, and hardware sales, grew 22% to $4.4 billion. It’s not clear how much of that is from YouTube and how much is from the other areas.

Sundar Pichai, CEO of Alphabet and Google, explained:

Given the depth of the challenges so many are facing, it’s a huge privilege to be able to help at this time. People are relying on Google’s services more than ever and we’ve marshalled our resources and product development in this urgent moment.

While Alphabet needs to prepare for the road ahead, the company seems pretty positive overall, having hired nearly 5,000 new employees during the first quarter. Presumably, the company wouldn’t take on so many new workers if it didn’t expect growth going forward. However, CNBC also reported the company is planning a slowdown on hiring for the rest of 2020, so it does seem to be hunkering down for a tougher road in the near future.

Interestingly, Google is bleeding money in some categories. Specifically, its “Other Bets” area, which lost a surprising $1.1 billion in Q1. That division includes X lab, Waymo self-driving subsidiary, and other more experimental divisions of the company. It’ll be interesting to see if the company cuts down on these losing efforts to help deal with the decrease in ad revenue, or if it will leverage these for future growth.