In the global search engine field, $Alphabet-C (GOOG.US)$ it can be said to be a dominant player, even Microsoft's ChatGPT-boosted Bing has not been able to threaten Google's leading position. Google's market cap has also surpassed two trillion US dollars this year, ranking steadily among the top five global market cap giants.

On October 29th, after the US stock market closed, Google will release its latest performance. Every time the company releases its performance, it may also mean a good trading or investment opportunity. Before that, investors need to understand how to interpret its performance.

How should we interpret Google's performance? What are the key points to focus on? Its core may lie in three aspects, including a foundation, a growth driver, and its shareholder returns.

1. Foundation: Advertising Business

When looking at a company's financial report, the first thing to focus on is the business with the highest revenue share. In Google's revenue composition, advertising revenue accounts for nearly 80% of total revenue, which can be considered as Google's foundation. For Google's advertising business, two main points need to be considered.

The first point is to pay attention to the growth of advertising revenue.

The advertising business has a certain cyclical nature. When economic expectations are not good, companies need to reduce costs and increase efficiency. The first thing that may be cut is advertising spending, thus bringing growth pressure to the entire advertising industry.

Previously, Google's advertising revenue growth rate has been declining from the peak in Q2 2021. Especially since Q2 2022, with the Fed entering a rate hike pace and downward economic expectations, Google's advertising growth rate has plummeted, showing consecutive negative growth for two quarters starting from Q4 2022.

However, by Q2 2023, Google's advertising revenue unexpectedly stopped declining and rebounded, with a year-on-year growth of about 3.3%. In the latest 2024 Q2 performance, the advertising revenue growth rate reached 11.1%, maintaining double-digit growth for three consecutive quarters. In future performances, we still need to continue monitoring whether the advertising revenue growth rate can maintain a high growth rate.

Secondly, pay attention to the market share changes of Google Search under the impact of ChatGPT. In Google's advertising business, the vast majority of revenue comes from Google Search ads, which is the foundation of Google's survival and development.

In the statistics from Statcounter, we can see that from January 2023 to September 2024, with the boost of ChatGPT, Microsoft's Bing market share has slightly increased by one percentage point. Google's market share has also seen a slight decrease, but still remains above 90%, maintaining its monopolistic position, and its moat and competitiveness may not have been significantly impacted. In the future, we can continue to observe if Google's market share can remain stable.

2. Growth point: Google Cloud

If the advertising business is Google's core business, then the cloud business is Google's core growth point. As of Q2 2024, Google Cloud accounts for just over 10% of overall revenue but is one of the company's main growth engines. For Google Cloud business, we can also focus on two points.

First, see if Google Cloud can maintain a high growth rate.

Currently, Google Cloud ranks third in the cloud computing service industry, although the market size is far behind Amazon and Microsoft, the cloud business growth rate remains leading among the three. However, under the impact of the overall slowdown in the cloud service market growth, the growth rate of Google Cloud business has also significantly slowed down. In the first two quarters of 2023, the growth rate remained stable at around 28%, dropping sharply to less than 23% in the 2023Q3 fiscal quarter. However, from 2023Q4 to 2024Q2, the growth rate of Google Cloud business stabilized and rebounded, once again exceeding 28%.

For the revenue growth expectations of Google Cloud, we can focus on a forward-looking indicator, which is the revenue backlog disclosed in the performance, mainly the amount of contractual revenue (revenue backlog) of Google Cloud's contracted customer orders that have not yet been executed. It can be said to be the reserve of Google Cloud business.

We see that Google Cloud's contractual revenue was approximately $78.8 billion in 2024Q2, rebounding strongly after a slight decline in the 2024Q1 quarter, setting a historical new high. This may be good news for Google Cloud's growth expectations. In the future, we can continue to observe whether Google Cloud's contractual revenue can maintain an overall growth trend.

Secondly, look at Google Cloud's profit margin. The cloud computing industry has obvious economies of scale to a certain extent. Only when it reaches a certain scale is there a possibility of profitability. The more customers use the products developed with the same amount of money spent on R&D, the higher their profit margin may be. Although Google Cloud's revenue growth far exceeds Amazon and Microsoft, its profit potential has always been the weakest due to its smallest revenue scale.

For a long time, Google Cloud has been in a sustained loss state, always acting as a drag on its overall profitability level. The good news is that the overall loss has gradually narrowed, until 2023Q1, as Google Cloud's revenue scale reached a critical point, combined with cost optimization brought about by layoffs, Google Cloud finally achieved its first quarterly profit in history, and continued to contribute positively to profit from 2023Q2 to 2024Q2 fiscal quarters. Starting from the 2023Q4 fiscal quarter, Google Cloud's operating margin exceeded 9%.

For future quarters, we need to observe whether Google Cloud's revenue growth can continue its rebound trend, and whether it can push the operating margin to continue to rise under the effect of economies of scale. If Google Cloud's profit margin can continue to improve, it may also boost Google's overall profitability to a new level.

3. Shareholder Returns: Share Buyback Situation

For tech giants like Google, both revenue and profit volumes are already huge, making it difficult to replicate the rapid growth miracles of the early stages. The future norm may be moderate to slow growth.

For the stock price trend, its long-term driving forces may include two aspects, one is the growth of performance, and the other is shareholder returns. If the growth is not enough, shareholder returns may need to make up for it. The core of shareholder returns mainly consists of share buyback and dividends. And Google is particularly generous in terms of buybacks.

Through share buybacks, on one hand, the number of outstanding shares can be reduced, thereby boosting earnings per share, on the other hand, it can inject additional funds and liquidity into the market, and ultimately lower the company's net assets to increase return on net assets, all of which can have a very positive impact on the stock price.

In recent quarters, Google's buyback amount has been maintained at around $15 billion, second only to Apple among all tech giants. Its return on net assets has mostly remained at a high level of around 20% in recent years. For future performance, we can continue to pay attention to Google's buyback situation. If it continues to buy back in large amounts, perhaps it will also inject more confidence into the market.

Having read this far, you may have some new insights on how to read Google's performance. It is worth mentioning that each time a star company releases its performance, it may mean a rare trading opportunity for different types of investors.

For example, if an investor reads the past performance and combines it with the latest developments and feels that a company's latest performance will release some positive signals and be bullish for the short-term stock price, the investor may consider buying the underlying stock or buying call options.

On the other hand, if an investor believes that a company's latest performance will not be optimistic and will put pressure on the short-term stock price, the investor may consider short selling through margin trading or buying put options.

Of course, if an investor finds that the direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance announcement, the investor may consider leveraging the volatility of its stock price and implement a straddle strategy by buying both call and put options to seize potential opportunities.

In conclusion,

Advertising business is Google's core business, its revenue has returned to growth in the past two quarters, we need to pay attention to the sustainability of its growth.

Google Search is the foundation of the advertising business, we need to focus on whether its market share can continue to remain high.

Google Cloud is an important growth driver for Google, its growth rate leads among giants, we need to pay attention to contract revenue as a forward-looking indicator of revenue growth.

Google Cloud's operating margin is relatively low, we need to pay attention to the improvement of its margin.

Against the backdrop of reduced growth expectations for Google, its high share buyback has a positive impact on the stock price, we can focus on the sustainability of its high buyback.

Each time the company releases its performance, it may bring potential trading opportunities. Investors can consider suitable trading instruments based on their individual risk tolerance.

Risk and disclaimer notice: The above content does not constitute any financial marketing or investment invitation, nor does it constitute any investment advice. Before making any investment decisions, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors when necessary.