To The Moon

$Alphabet(GOOG)$ dropped more than 6% after the release of its Q4 financial report on January 30th, with many media attributing it to disappointment in the advertising business. $Alphabet(GOOGL)$ $1X GOOG(GOOG.UK)$

In fact, the essence is still the over-expectation of AI, and "not fully realized" is also reasonable.

Q3: Cloud business growth rate of $Microsoft(MSFT)$ surpassed Google, results investors favoring Microsoft over Google. At the same time, due to the "excessive price-in" after overly pessimistic expectations for Google's advertising in the first half of the year, a "overbought pullback" occurred after the financial report.

Q4: The growth rate of cloud business has rebounded, driven by AI demand, but the advertising business has once again been "over-expected", and market judgment has always deviated from the economic cycle. At the same time, the soaring R&D expenses have affected operating profit, leading investors to start "realizing expectations".

Investment Highlights

1. Not only Microsoft, Google is also a beneficiary of AI. The year-on-year growth rate increased from 22.5% in the previous quarter to 25%, due to increased demand driven by Gen AI. The company also launched its most powerful large-scale language model Gemini last month. At the same time, the company will soon launch the Gemini Ultra AI model, hoping to use the Gemini AI model to support advertising products.

2. Advertising is the reflection of AI efficiency. Revenue from search and alliance advertising was $480.2 billion, lower than the market's expected $481.5 billion. Factors affecting this include display algorithms and policies. This year, Google will block 1% of users from using third-party cookies, which may lead to some growth.

However, more importantly, it is about overall economic expectations. The market will more likely consider Google's advertising as an indicator of economic strength or weakness. Looking at Microsoft's lackluster advertising revenue, it is expected that only "high-conversion" advertisements related to video or direct commercial activities will have better growth this year.

YouTube advertising revenue increased from 12.5% in the previous quarter to 15.5% in Q4, so platforms like Meta Platforms (META) relying on social media and short videos may not necessarily fall short of expectations (to be revealed in 2 Days).

3. Profit slightly below expectations, affected by the decline in the proportion of advertising and the cost increase brought by AI. Google Cloud's operating profit margin has increased to 9.4%, but the overall operating profit margin remains unchanged at 35%. Therefore, the company's early-year layoffs in the advertising business are also a demonstration of "AI efficiency improvement". Additionally, because from 2023, service equipment depreciation will increase from 4 years to 6 years, the profit margin will also increase in the future.

A replication of post-Q3 Earning?

Same plunge, but different factors.

1. The rise in 23Q4 was led by the AI business, benefiting the overall big tech industry. Google's cloud business, which was criticized, has naturally been picked up by investors again; but this time, there is an expectation of oversupply in the cloud business, and it will need to prove that the growth of advertising business or other AI-related businesses exceeds expectations in order to better appease investors.

2. The end of October happens to be the bottom of the market's phase-wise pullback, creating conditions for a big rise in November. And now the market is at a new high position. Although there may be an interest rate cut, it may also fall through, or economic data may not meet expectations, in which case Google's advertising business may be more sensitive.

Q4 Earnings Overview