Google: With the tariff hammer swinging nonstop, can the ad giant really stay as stable as a rock?

After the market closed on April 24, Eastern Time, $Alphabet(GOOGL.US) parent company Alphabet released its Q1 2025 financial report. As an industry most directly impacted by the macroeconomic effects of tariffs, Google's performance as an advertising leader will receive more market focus than usual.

In reality, Google's Q1 performance was strong, significantly better than the recently further downgraded expectations (BBG consensus expectations did not fully reflect the adjustments). However, compared to the Q1 performance, the outlook after Q2 is more critical. Google generally does not provide performance guidance, and this time the conference call is likely to face analysts' probing questions, so it is advisable to pay attention.

Dolphin Research tends to believe that aside from "uncertainty," management cannot provide a clearer description, merely emphasizing its advertising ROI advantages and historical coping experience. The current advertising outlook depends entirely on the progress of tariff negotiations; without substantial positive developments, businesses will be more cautious in their budget allocations. If subsequent negotiations do yield good news, any change in business attitudes will likely not be reflected until at least Q3. Therefore, Q2 is a certainty within uncertainty—certain is poor performance, uncertain is how poor it will be. This commentary will not only summarize performance but also discuss Google's current situation and safety margins.

Specifically, the core information is as follows:

1. Slightly reassuring Q1 performance: The Q1 performance was significantly stronger than cautious expectations, especially reflected in profitability. The Q1 operating profit margin continued to rise to 34%, showing no signs of pressure from increased expenditures.

Both costs and expenses have been optimized, with the gross profit margin rising to 59.7%, and sales expenses declining year-on-year, continuing to be strictly controlled. R&D expenses continue to expand, growing 14% year-on-year, with the addition of 2,400 new employees in Q1 primarily coming from R&D.

2. An additional $70 billion repurchase authorization: In Q1, $15.1 billion was repurchased, and $2.4 billion was distributed as dividends. Amidst the uncertainty of the broader environment and the pressure on profits from high investments this year, continued repurchases by management are expected to support valuations.

Although there is still nearly $10 billion left from the $70 billion repurchase authorization announced in the same period last year, the company has decided to add another $70 billion. The total shareholder return from repurchases and dividends amounts to $80 billion, and with the market capitalization shrinking to $1.94 trillion, the return yield has increased to 4%.

3. Resilience in search advertising, focus on performance outlook: Q1 search advertising showed greater resilience, while YouTube advertising may have slowed down more quickly due to a significant proportion of brand advertising. Affiliate advertising remains the least competitive, continuing to decline year-on-year.

Although advertising revenue slightly exceeded expectations (mainly from search advertising), the trend of slowing growth has not been broken; this merely reflects the weakening of domestic consumption in the U.S. since mid-February and the adjustments in business budget allocations. In Google's advertising ecosystem, the presence of many service consumption ads, such as travel and healthcare, has resulted in the proportion of retail and fast-moving consumer goods ads, which are experiencing marginal weakness, being lower than the overall industryThe contribution of e-commerce in the Asia-Pacific region to total revenue is not as high as that of Meta, so the actual impact is also lower compared to peers.

However, as we enter the second quarter, it is still uncertain how powerful the tariff stick will be; at least it cannot be linearly extrapolated from the first quarter situation. Especially in the automotive and travel advertising sectors, which have a significant share in Google Ads, there has been a reversal in marginal trends following the tariff war. Google generally does not provide performance guidance in its financial reports, so this conference call will be crucial.

4. High growth in cloud business, cautious full-year expectations are overly optimistic: The cloud business did not surprise in the first quarter due to high expectations, with a year-on-year growth rate of 28%, maintaining high growth. The operating profit margin of the cloud business continues to improve, which is quite rare.

Last quarter, the scale of Google's backlog contracts grew by 26% year-on-year, with a slowdown in growth. The reason for the slowdown may be related to supply in the short term. During the Q4 conference call, management mentioned that due to insufficient supply of servers, such as computing power, customer demand was not fully met and was forced to be suppressed.

Due to AI, the market has confidence in its growth momentum, and institutions have not made significant adjustments to cloud business growth expectations in the past month. However, at the GCP Next conference in mid-April, it was also mentioned that due to the broader environment, there has been a cooling of demand from some customers, which requires caution.

5. Other revenues exceeded expectations: In the first quarter, other revenues rebounded after passing through the sales cycle disturbance of Pixel 9, with subscription revenues from YouTube and Google One contributing the main driving force.

6. Key indicators compared to expectations

Dolphin Research's Viewpoint

In the trade war, besides the directly affected import and export chains, advertising is the most impacted. This is not only because U.S. retail fast-moving consumer goods rely heavily on imports, but also due to the rising geopolitical risks under national confrontation, which will similarly affect service consumption such as tourism and finance. Marketing expenditure is often the first category for companies to "reduce costs and increase efficiency," so advertising is naturally the first to be affected.

However, the key question is where market expectations are headed. After all, before the tariffs were implemented in April, due to weakening marginal consumption, advertising platforms led by Google had already entered a phase of adjustment. After Trump wielded the tariff stick, stock prices entered a sharp decline channel. The changes in the tariff war are too rapid, and the reform of AI computing power and the competition for entry points have also accelerated. Institutions have even been unable to fully assess the actual impact and can only follow the sentiment to mark down part of the valuation.

The only certainty is "uncertainty." According to the expectations updated by some institutions in the past week, the market's adjustment of Google's performance expectations for this year by 3%-5% is not significant, but the valuation has already been "temporarily" anchored at historical bottom pressure points—2012 and 2022.The past two years have been extremely challenging for Google's performance, especially in terms of profit, with direct consecutive negative growth for 2-3 quarters. Due to significant short-term performance pressure and expectations of normal cyclical fluctuations, the performance from two years ago is used as a benchmark, with a P/E valuation in the range of 12-15x.

The former (2012) is not suitable for direct comparison due to the impact of mobile, the competition initiated by Meta/Amazon, large-scale mergers and acquisitions dragging down profits, and multiple negative factors from antitrust issues. However, the latter (2022) represents a bottom valuation position during a significant performance pressure over the past decade, which is more likely to be used as a reference anchor by most funds. Therefore, as long as there are no new escalations in the trade war, this can be seen as a short-term emotional bottom turning point, suitable for swing trading.

However, to expect sustained upward momentum, one cannot ignore the fundamentals. Although large platforms with effective advertising will have a relative advantage during the advertising pressure period, Dolphin Research is inclined to be somewhat cautious this year:

On one hand, regardless of the tariffs, there will always be a landing point. Even during the negotiation tug-of-war, the damage to the real economy has already occurred, and at least this year, the "uncertainty" of the sword of Damocles will suppress merchants' willingness to increase marketing, making it difficult to pull back advertising budgets. In the second quarter, automotive and travel ads, which account for a significant portion of Google's advertising, may reverse the strong trend of the first quarter under the impact of tariffs, increasing pressure for the second quarter and the entire year.

On the other hand, the arms race regarding AI is still ongoing. The computing power deflation brought by DeepSeek has not adjusted Google's investment expectations (reiterated a $75 billion Capex at the GCP Next conference in mid-April; recruitment efforts have not diminished since the beginning of the year), at most affecting a new balance of internal expenses, increasing R&D while reducing sales, administrative, and other expenditures.

In addition, as the speed of AI development continues to refresh our expectations, Google's search is no longer as worry-free as it was two years ago, and it is necessary to pay attention to the risk of entry erosion. In Dolphin Research's view, although AI Overview does help improve search activity, from the merchants' perspective, an increase in search volume does not necessarily mean an absolute increase in budget; it is more about how to allocate shares among different channels. Among them, AI platforms led by ChatGPT remain a long-term threat to traditional search engines, although the former currently has limited advertising budgets due to its business model and advertising ecosystem still being built. However, social platforms actively developing AI search habits within their platforms are expected to reap benefits more quickly.

Finally, recent hearings are underway regarding Google's antitrust lawsuit (default search engine on mobile devices, unfair competition in advertising technology). Discussions about the antitrust case can be traced back to Dolphin Research's detailed discussion in the 3Q24 financial report commentary

The following is a detailed interpretation of the financial report

I. Basic Introduction to Google

Google's parent company Alphabet has a wide range of businesses, and its financial report structure has changed multiple times. Friends who are not familiar with Alphabet can first take a look at its business structure.

To briefly explain the long logic of Google's fundamentals:

a. The advertising business, as the main source of revenue, contributes significantly to the company's profits. There is a medium to long-term risk of search advertising being eroded by information flow advertising, which is being supplemented by the high-growth streaming service YouTube.

b. The cloud business is the company's second growth curve, which has turned profitable and has shown strong order momentum in the past year. As advertising continues to be dragged down by weak consumer spending, the development of the cloud business is becoming increasingly important to support the company's performance and valuation expectations.

II. Revenue: Solid Foundation, Exceeding Cautious Expectations

In the first quarter, Google's overall revenue was $90.2 billion, a year-on-year increase of 12%, exceeding expectations.

Among them, the core pillar, the advertising business, accounted for 75% and grew by 8.5% year-on-year, showing a significant slowdown under a high base. The absence of political advertising in the first quarter, coupled with weakened consumer spending since February, led businesses to adjust their advertising budgets.

Beyond advertising, Google Cloud Services, driven by AI, continued to grow at a high rate of 28%, with market expectations being relatively full, which was not surprising.

Additionally, other revenues from YouTube subscriptions, Google Play, and the Pixel series hardware have rebounded after the disruption caused by the sales cycle of the Pixel series, with YouTube and Google One subscription revenues contributing significantly to the growth.

Specifically:

(1) Advertising: Under Pressure, Search is More Stable than YouTubeIn the first quarter, advertising revenue reached $66.9 billion, with an overall growth of 8.5%, showing signs of slowdown. Apart from the impact of a high base, this is mainly due to the weakening marginal consumption since February, leading to adjustments in merchants' advertising expectations. From the perspective of segmented businesses, the ranking of slowdown magnitude and stability is still Search > YouTube > Affiliate Ads.

From the overall classification of advertising, Google's advertisers, apart from those directly related to retail and trade war imports and exports, the TOP 5 are mostly service consumption, such as finance, tourism, and media entertainment. This can relatively withstand the impact when the tariff war does not escalate into geopolitical confrontation. However, if it escalates to a national confrontation stage, the impact will also be significant.

In other words, if it is just moderate tariffs, even considering economic impacts, the effect on Google Ads is relatively light. But currently, this is not applicable; the trade war is only temporarily on hold, but the posture of major power confrontation has already been established.

a. Search Ads

In the first quarter, Google's search revenue was $50.7 billion, a year-on-year increase of 9.8%. As a high-traffic platform for click conversion pricing, performance advertising is generally the last budget that merchants cut during industry pressure periods. Moreover, initially, merchants may redirect brand advertising budgets from small and medium platforms back, which enhances resilience.

Of course, the situation in Q1 only reflects some budget adjustments by merchants due to the weakening of domestic consumption margins and does not include the cooling of merchants' advertising willingness in response to tariffs, especially under unexpected tariff confrontations. Although Dolphin Research still recognizes that search ads will maintain relative strength in this process, for such a large-scale advertising company, especially with a significant proportion of retail ads, the influence of Beta is still greater.

As for the Alpha level, the AI Overview launched last year has greatly helped improve user search activity, consolidating Google's search kingdom to some extent, with daily active user growth continuously increasing since last yearHowever, from a medium to long-term perspective, as the speed of AI development continues to refresh our expectations, it is difficult to curb the traffic competition of AI platforms against traditional search entry points. Since the beginning of this year, with ChatGPT announcing the opening of its search function and allowing the use of basic reasoning models like OpenAI 3-mini without registration, ChatGPT's traffic has accelerated rapidly, leading to a surge in downloads.

Currently, the business model of AI platforms mainly relies on paid services, and the advertising ecosystem for advertisers has not yet been fully established, resulting in limited direct advertising budgets. However, social platforms that actively cultivate AI search habits within their platforms are expected to reap some benefits at a faster pace.

b. YouTube Advertising

YouTube is more sensitive to macroeconomic pressures compared to search due to its brand advertising. In the first quarter, it achieved advertising revenue of $8.9 billion, a year-on-year increase of 10.3%, but a quarter-on-quarter slowdown of 3.5 percentage points.

From the perspective of revenue contribution from different advertisers, retail, financial services, and fast-moving consumer goods account for the highest proportions on YouTube, and these three categories have been significantly impacted during the trade war.

However, YouTube has a large amount of traffic and also features Shorts, which can offset some of the impacts. Additionally, YouTube has consistently maintained a good share of viewing time in CTV, with high user demand, which either converts into paid memberships or leads to higher advertising revenue.

c. Affiliate Advertising

Affiliate advertising revenue declined by 2% year-on-year in the first quarter, making it one of the first channels to be cut by merchants during industry pressure, especially after the increase in AI Overview.

For platforms that rely on Google for advertising distribution, AI search Q&A provides the optimal answers in a summarized format, eliminating the need for users to click through links, which significantly reduces the effective user clicks and behavioral data obtained by distributors, thereby affecting the advertising effectiveness for distributors.**

(2) Cloud: Maintaining High Growth, Cautious About Overly Optimistic Full-Year Expectations

The cloud business did not surprise in the first quarter due to high expectations, with a year-on-year growth rate of 28%, maintaining high growth. The operating profit margin of the cloud business continues to improve, which is quite rare.

Last quarter, Google's backlog of contracts grew by 26% year-on-year, with a slowdown in growth. The reason for the slowdown may be related to supply in the short term. During the Q4 conference call, management mentioned that due to insufficient server supply, such as computing power, customer demand was not fully met and was forced to be suppressed.

Due to AI, the market is relatively confident in its growth momentum, and institutions have not made significant adjustments to their growth expectations for the cloud business in the past month. However, at the GCP Next conference in mid-April, it was also mentioned that due to the broader environment, there has been a cooling of demand from some customers, which requires caution.

The cloud business is B2B, so its long-term trend may be related to its own product competitiveness, but short-term changes are more easily affected by the current or previous new contract signing scale.

Therefore, Dolphin Research generally assesses short-term trends through Google's Revenue Backlog metric. Most of this metric comes from the cloud business, so its trend can also be seen as the trend of the unfulfilled contract volume of the cloud business.

From the contract scale situation, the prosperity of the cloud business in the first quarter remains high, while there is a slight sequential slowdown. As of the fourth quarter (the first quarter data needs to wait for the complete annual report submitted to the SEC, although the data is lagging, the overall trend can still be observed), Google's cloud backlog reached 93.2 billion, a year-on-year increase of 26%, slowing down compared to the previous quarter. Dolphin Research estimates a net increase in contracts of 18.4 billion, which is also slightly lower than the 19.4 billion in the third quarter.

For the contract backlog situation in the first quarter, Dolphin Research will update it in the Longbridge app's deep data module after the complete annual report is disclosed, so please pay attention if interested.

(3) Other Businesses: Rapid Slowdown in Growth, Mainly Due to Pixel Sales Cycle Misalignment

In the first quarter, other revenues achieved 10.4 billion, a year-on-year increase of 18%, with a rebound in growth. On one hand, the impact of the Pixel sales cycle has passed, and on the other hand, the subscription revenue growth from YouTube and Google One contributed significantly to the main driving force. This part of the revenue mainly consists of YouTube subscriptions (TV, music, etc.), Google Play, Google One, and hardware (Pixel phones and smart home devices like Nest).

III. Profit: Significantly Exceeds Expectations, but Difficult to Continue Improving This Year

In the first quarter, the operating profit of the core business reached 30.6 billion, a year-on-year increase of 20%, with the profit margin rising to 34%, exceeding market expectations, and seemingly not reflecting the pressure from increased expenditures.

Overall, both costs and expenses have been optimized, with the gross profit margin increasing to 59.7%. Sales expenses have declined year-on-year and continue to be strictly controlled. R&D expenses continue to expand, with a year-on-year growth of 14%. The 2,400 new employees added in Q1 are likely mainly from R&D.

By business segment, the profit margin of the cloud business further increased to 17.8%. Market expectations are that the operating profit margin of the cloud business can steadily rise to 20% in the next two years.

In the first quarter, capital expenditures were 17.2 billion, in line with market expectations. At the GCP Next conference in mid-April, despite the trend of computing power deflation triggered by DeepSeek and the high uncertainty brought by tariffs, Google reiterated its Capex of 75 billion for this year, indicating that subsequent investments will continue to increase. Given the high willingness to invest and the relatively certain slowdown or even pressure on revenue this year, profit pressure arises from the compression on both ends.

This highlights the stabilizing role of the management team, especially during a period when the company's static valuation is historically low. Although there is still nearly 10 billion left from the 70 billion repurchase announced in the same period last year, the company has decided to add another 70 billion. The overall shareholder return scale from buybacks and dividends is 80 billion, and as the market value shrinks to 19.4 trillion, the return yield rises to 4%.

Dolphin Research "Google" Historical Collection:

Earnings Season

February 5, 2025, conference call: [Google (Minutes): Cloud Slowdown is Due to Insufficient Investment, More Investment is Needed Ahead!](https://longportapp.com/zh-CN/topics/26982702?invite-code=)》

February 5, 2025 Financial Report Review: Google: $75 Billion Crazy Investment in AI, Big Brother Goes Crazy Beyond Meta

October 30, 2024 Conference Call: Google: Improving Efficiency and Investment, Advancing Simultaneously (3Q24 Conference Call Minutes)

October 30, 2024 Financial Report Review: Google: Haunted by Little Demons? AI Solves All Troubles

July 24, 2024 Conference Call: Google: Better to Over-Invest than Under-Invest (2Q24 Conference Call)

July 24, 2024 Financial Report Review: 360-Degree Unobstructed View, Is Google Really That Stable?

April 26, 2024 Conference Call: Google: Outlook for Margin Expansion, Quarterly Capital Expenditure Higher than Q1 (1Q24 Conference Call Minutes)

April 26, 2024 Financial Report Review: Google Soars? Learning from Meta, Competing to Be the Best

January 31, 2024 Conference Call: AI Operations Efficiency, AI Product Innovation, AI Spending... (Google 4Q23 Conference Call Minutes)

January 31, 2024 Financial Report Review: Google: Expectations Too Enthusiastic, Big Brother Pours Cold Water

October 25, 2023 Conference Call: [Google: Cloud Slowdown Due to Corporate Clients Optimizing Capex, Signs of Stabilization Observed (3Q23 Performance Conference Call Minutes)](https://longportapp.com/zh-CN/topics/10385964?invite-code=)》

October 25, 2023 Financial Report Review: Google: Advertising Still the Leader, Is Cloud Slowdown Due to "AI Not Performing"?》

July 26, 2023 Conference Call: Google: Investing in AI, Benefiting from AI (2Q23 Earnings Conference Call Minutes)》

July 26, 2023 Financial Report Review: Google: Breaking Doubts, Can the Advertising Leader Make a Comeback?》

April 26, 2023 Conference Call: AI Competition Continues, Focus on Search and Cloud (Google 1Q23 Conference Call Minutes)》

April 26, 2023 Financial Report Review: Google: Exceeding Expectations Against the Trend? Joy Comes with Worries》

February 3, 2023 Financial Report Review: Focusing More on Revenue Growth Rather Than Just Cutting Guidance (Google 4Q22 Conference Call Minutes)》

February 3, 2023 Financial Report Review: Short-term Pressure is Significant, Google Needs to Learn from Meta》

October 26, 2022 Conference Call: Short-term Resource Optimization, Opportunities Still Lie in Search and YouTube (Google 3Q22 Conference Call Minutes)》

October 26, 2022 Financial Report Review: Google: Recession Approaching, Advertising Leader Has Fallen》

July 27, 2022 Conference Call: Google: Economic High "Uncertainty" in the Second Half of the Year, Focused Investment in Areas with Better Long-term Prospects (Conference Call Minutes)July 27, 2022 Financial Report Review: Google: "Tough Submission" Under the Expectation of a Blowout

April 27, 2022 Conference Call: Management Avoids Discussing TikTok, but the Emphasis on Shorts Still Indicates Intensifying Competition (Google Conference Call Minutes)

April 27, 2022 Financial Report Review: Google: Constant Headwinds, Even the Big Brother Struggles