In this MarketFoolery video segment, host Chris Hill and Supernova and Rule Breakers‘ David Kretzmann dig into the details of Alphabet‘s (NASDAQ:GOOG) (NASDAQ:GOOGL) second-quarter report, which certainly had its positive notes: How does a company this size grow revenue 22% in a year? The answer — unfortunately for shareholders, who took a bit of a loss on the day — is that it buys that growth, at an ever higher cost. Still, given all the things it’s doing right, that’s no reason to be a pessimist.
A full transcript follows the video.
This video was recorded on July 25, 2017.
Chris Hill: Let’s move over to Alphabet. Second-quarter revenue grew 21%, also an astonishing number when you consider just how big Alphabet is, and how much money that company makes. But the share’s down a little bit today. Some of the key metrics are going in the wrong direction, and top of that list is cost per click.
David Kretzmann: Yeah, cost per click is down 26%. That is sort of made up with the volume of clicks. Paid clicks overall are up 52%. So you’re seeing the number of clicks going up, but the cost per click is going down. So you’re seeing some pressure on margins there, but that has been an ongoing trend. So that isn’t necessarily anything new. If you look at just the Google segment, that’s the core advertising segment for the company, it makes up about 90% of total revenue — that segment’s revenue was up 21%, but the traffic acquisition costs, essentially the cost to get that revenue, grew 28%. So you’re seeing that pressure on margins, but like I said, I don’t think this is anything necessarily new to worry about. If this becomes an ongoing trend where you’re seeing the costs rise and revenue continue to decelerate, then that might be something you need to take a step back and look at.
But at this point, for one quarter’s results, I think there’s still a lot to like with this…