Opinion: Alphabet cracks the lid on a black box that’s still too opaque

  • YouTube
  • Tuesday, 04 Feb 2020

US$15.1bil (RM62.14bil) of Alphabet's revenue comes from YouTube. — Bloomberg

Let me start by saying that I am new to writing about Alphabet Inc. I’m usually based in Asia, where I write about Foxconn Technology Group, Samsung Electronics Corp and Alibaba Group Holding Ltd, among others.

These are huge companies that lead their sectors and have different levels of transparency. When I started preparing to cover US technology giants, I figured that the high standards of earnings disclosure at the centre of global capitalism would make life a little easier.

Then I started looking at Alphabet Inc, which on Feb 3 reported revenue that missed some estimates.

It beggars belief that for more than a decade analysts, investors and traders were forced to navigate blind through the black box that was its earnings report.

Then came Feb 3’s announcement.

For the first time, executives deigned to tell investors just how much revenue comes from YouTube (US$15.1bil/ RM62.14bil) and from its cloud business (US$8.9bil/ RM36.63bil). It feels like a revelation, as though we’ve been let in on a secret. But when you live in a dark cave, even candlelight can seem bright.

While I welcome this move toward transparency, it feels more like a company trying to pacify investors rather than truly inform them. It’s long overdue, but the company can do even more.

Before the fourth-quarter earnings announcement, Alphabet broke down advertising revenue only by properties, by network members’ properties, other revenue and other bets. By region, investors are given EMEA, APAC, US and Other Americas. And it shares traffic acquisition costs.

Now it’s added two more line items: YouTube, the world’s most ubiquitous video-sharing platform, and Cloud – a hot business that competes against Amazon.com Inc, Microsoft Corp and dozens of others.

Despite this additional information, I still don’t think investors truly have an understanding of exactly where this company gets its revenue, what divisions make and burn money, and which platforms are lucrative and which are loss leaders (or just losers).

Google search and other advertising accounted for 61% of sales last year; that’s a very big pie that could certainly by sliced up further. It doesn’t feel like a coincidence that the two extra divisions it’s breaking out are the ones that grew the fastest last year.

Still lacking is any clarity on the product that gives directions to more people than anyone else (Google Maps), the one that has become one of the most pervasive email services (Gmail) nor the operating system that’s in the hands of literally billions of people across the planet (Android).

I don’t own shares in Alphabet or any company I cover. But as an investor, I’d want to understand just how Google monetizes the Android operating system and whether that’s improving or deteriorating in tandem with the spread of smartphones globally. I’d also like to know whether Maps and Gmail are winners or loss leaders. Of course, it would be fascinating to know how that US$1bil (RM4.12bil) HTC Corp acquisition is faring, given that it’s meant to be a springboard into hardware devices that pit Google against its own Android partners.

I guess Alphabet just lumps all this in with Google search or "Other”. Investors are right to want more information.

And it’s not some esoteric pondering. There’s evidence to suggest that disclosure truly matters. For example, a study by Stanford University accounting professor Mary Barth and her co-authors found that "firms with more transparent earnings enjoy a lower cost of capital”. And Professor Robert G Eccles of the University of Oxford and previously of Harvard Business School has written numerous papers discussing transparency from different angles, including the conclusion that the United States ranks low in terms of quality of disclosure.

Amazon.com Inc is an example of a company that’s improving. Its disclosures, in my opinion, have become more enlightening over the years to the point that observers can analyse multiple slices of the business to get a sense of which units are more profitable, which are growing, and where it’s making money. Investors can see, for example, that its overseas business is a loser and physical retail shrank. Yet those facts didn’t stop its market value from surpassing US$1tril (RM4.12tril) last week. Amazon still falls a little short, though.

For a gold standard in transparency, let me offer up Taiwan Semiconductor Manufacturing Co, which trades in New York and Taipei. Despite being a US$270bil (RM1.11tril) company entrusted with the secrets of the world’s most important technology clients, the chipmaker offers so much information about how it operates that you could almost replicate its business model. It may be worth noting that both TSMC and Amazon provided better risk-adjusted returns over the five years to Dec 31 than Alphabet, though remember that correlation doesn’t equal causality.

So while I applaud Alphabet on these latest disclosures, there’s no doubt that the world’s biggest search engine has a whole lot more to share. – Bloomberg

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