There has been skepticism towards Google due to the rise of ChatGPT in 2023. Many speculate that with ChatGPT's support, Microsoft's Bing search engine may pose a threat to Google's core search business and rapidly erode its market share. But is this really the case? We may find the answer by poring over Google's financial reports and operating data.

On April 25th, after the market closes, Google will release its latest financial report. What are the key points we may pay attention to? The crux may lie in two aspects: main revenue streams and a growth point.

1、Main Revenue Stream: Advertising

When examining a company's financial report, it is important to focus on the business segments that generate the highest revenue. In Google's revenue structure, advertising revenue accounts for nearly 80% of total revenue and can be considered its core business. There are two main aspects to consider when evaluating Google's advertising business.

Firstly, it is important to monitor the growth of advertising revenue.

The advertising business is cyclical in nature, and during times of economic downturn, companies tend to cut costs and reduce advertising spending, which can put pressure on the entire advertising industry.

Previously, Google's advertising revenue growth rate had declined steadily since reaching its peak in Q2 2021. Especially from Q2 2022, with the Fed's rate hike and economic slowdown, the growth plummeted sharply, resulting in two consecutive quarters of revenue slowdown starting from Q4 2022.

However, in Q2 2023, Google's advertising revenue unexpectedly rebounded with a year-over-year(YoY) growth of about 3.3%. In the Q4 2023 financial report, advertising revenue marked its third consecutive quarter of growth, surging 11% year-over-year. In future reports, we may need to continue monitoring whether this upward trend can be sustained.

The second aspect to consider is the impact of ChatGPT on Google's search market share. In Google's advertising business, the majority of revenue comes from Google Search ads.

According to Statcounter's data, From January 2023 to March 2024, with ChatGPT's support, Microsoft's Bing search engine gained an uptick in market share. Google's overall market share dipped correspondingly, but still maintained over 90% and remained dominant, indicating that its competitive edge and moat may yet to be meaningfully impacted. We need to continue to monitor whether Google can maintain its dominance.

2、Growth Point: Google Cloud

If Google's advertising business is its core revenue stream, the cloud segment may be its key growth engine. As of Q4 2023, Google Cloud accounts for just over 10% of overall revenue but is one of the company's primary growth drivers. When evaluating Google Cloud, there are also two key points to consider.

Firstly, it's important to monitor whether Google Cloud can maintain its high growth rate.

Currently, According to Synergy Research Group, Google Cloud ranks third in the cloud computing services industry, with a market size far smaller than Amazon and Microsoft. However, its growth rate has remained ahead of the other two. Nevertheless, under the impact of the overall slowing growth in the cloud service market, Google Cloud's growth rate has also significantly decelerated. In the first two quarters of 2023, the growth rate stayed stable at about 28%, but it dropped suddenly to less than 23% in Q3 2023. In Q4 2024, Google Cloud's growth steadied, bouncing back to around 25.7%.

When it comes to revenue growth expectations for Google Cloud, we may focus on a forward-looking indicator—the revenue backlog disclosed in the earnings report. This mainly refers to the amount of contracted customer orders that Google Cloud has yet to execute and may be seen as the "residual value" of Google Cloud.

We can see that the revenue backlog for Google Cloud hit around $74.1 billion in 2023Q4, marking a substantial increase for the second straight quarter following a slight dip in Q1-Q2. This uptrend may signal positive growth prospects for Google Cloud.

Secondly, we must consider the profitability of Google Cloud. The cloud computing industry demonstrates clear economies of scale, which means that companies need to attain a certain size to achieve profitability. As more customers adopt products with similar R&D investments, there may be greater potential for higher profit margins. However, despite Google Cloud's impressive revenue growth in comparison to Amazon and Microsoft, its smaller size has hindered its ability to generate profits at levels comparable to these competitors.

For a long time, Google Cloud has been a drag on the company's overall profitability due to continuous losses. However, in recent quarters, its losses have narrowed, and it made its first-ever quarterly profit in Q1 2023, thanks to the meaningful revenue scale and cost reduction through workforce restructuring. The segment has continued to contribute positively to profits in Q2-Q4 2023. During the Q4 2023 fiscal period, Google Cloud's operating margin reached approximately 9.4%, nearing double-digit profitability.

In future financial quarters, it is important to observe whether Google Cloud can reverse the downward trend in revenue growth while leveraging economies of scale to increase margins.

3、Shareholder Returns: Share buyback is key

For tech giants like Google, achieving the rapid growth seen in earlier stages may no longer be feasible, given their enormous revenue and profit levels. Moderate to low growth rates may become the norm in the future.

In terms of stock price trends, two driving forces may play a key role: performance growth and shareholder returns. If Google's growth rate is not up to the mark, they may have to rely on shareholder returns. Share buybacks and dividends are the primary ways of providing such returns, and Google has been giving significant attention to share buybacks in particular.

Google's buyback program allows the company to decrease the number of outstanding shares, which increases earnings per share and may positively impact the stock price. Additionally, Google can inject additional funds into the market through these buybacks, reducing net assets and improving return on equity.

In recent quarters, Google has maintained a buyback amount of approximately $15 billion, which is second only to Apple among all tech giants. Its return on equity has remained at around 20% in recent years. We may continue to focus on Google's buyback situation in future financial reports since high-value buybacks may boost market confidence.

Google's advertising business is its core revenue source, and it has returned to growth over the past two quarters. We can monitor whether this growth will continue.Google Search forms the foundation of its advertising business, so we should pay attention to whether its market share can remain high.Google Cloud is an important area of growth for Google; we should focus on revenue backlog as a forward-looking indicator of revenue growth.However, Google Cloud's operating profit margin is relatively low, so we need to monitor any potential improvements in its profit margin.Given lower expectations on Google's growth, its high buyback program has had a significant effect on the stock price. We can keep an eye on whether this high-value buyback program remains consistent.