Trending Assets
Top investors this month
Trending Assets
Top investors this month
Alphabet's Gross Profit Margin $GOOGL 2015-2021
Post media
Source: Google 10K reports, StockOpine analysis

Alphabet’s Gross Profit Margin (GPM) gradually declined from 62.4% in 2015 to 53.6% in 2020, although, the declining trend reversed in 2021 with the GPM rising to 56.9%.

Cost of revenue
Alphabet’s GPM deteriorated in the period under review as cost of revenues which consist of traffic acquisition cost (TAC) and other cost of revenue accelerated at a faster pace than revenues.

Post media
Source: Google 10K reports, StockOpine analysis

TAC includes amounts paid to distribution partners who make Google Search available through their channels. For example, Google pays Apple for being the default search engine on Safari. TAC also includes amounts paid to Google Network partners primarily for ads displayed on their properties.

Other cost of revenues includes expenses for data centers, content acquisition cost for Youtube and Google Play, and cost related to hardware products.

Traffic Acquisition Cost

Post media
Source: Google 10K reports, StockOpine analysis

While one would expect the TAC rates to increase from the ongoing shift from desktop to mobile, as mobile carries higher TAC rate, its adverse impact was offset by the revenue mix change from ads on Google Network properties to ads on Google Search & other properties. For example, revenue from Google Network Members properties declined from 18.4% in 2017 as a % of advertising revenues to 15.1% in 2021. It should be noted that Google Network properties TAC rate is in the range of 70% while TAC rate for Google Search & other properties is in the mid-teens range.

Other cost of revenues
Other cost of revenues over the same period increased at an even faster rate compared to TAC, pushing the GPM lower. The main reason for this, was the change in revenue mix with non-advertising revenues (Cloud and Other) and YouTube gaining revenue weight and reaching (combined) 30% of total revenue in 2021 Vs 21% back in 2017. Since other cost of revenues include data center expenses, content acquisition costs and hardware costs etc., the investments in those segments drove expenses higher.

Post media
Source: Google 10K reports, StockOpine analysis

2021 improvement in GPM
Despite the gradual decline in gross profit margin since 2015, Alphabet improved its GPM from 53.6% in 2020 to 56.9% in 2021 benefiting from higher revenue growth (41%) compared to the cost of revenue growth of 31%.
One of the main drivers of the margin improvement was mix driven with Google Search revenue growing faster than Google Network Properties and Google other revenues, thus accounting for a higher % of revenue (58% in 2021 Vs 57.3% in 2020). Additionally, a reduction in depreciation expense in 2021 due to a change in the estimated useful life of servers and certain network equipment had a positive impact on GPM of approximately 0.8%. Even if we exclude this non-recurring / accounting impact there was still an improvement of c. 2.5% in GPM.

To conclude, GPM could be adversely affected as revenue mix shifts from Google Search towards other segments such as Google Cloud, Google Play, hardware products, and YouTube however, segments such us Google Cloud are at early stages of their lifecycle, therefore they are not yet optimized for profitability given the ongoing investments. Such investments allow the company to further grow and widen its moat.

Disclaimer: Not a financial advice.

Related
Already have an account?