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Google’s new chief financial officer, Anat Ashkenazi, has only been on the job for a few weeks, and Wall Street analysts already have some pointers for her.
Ashkenazi, who was previously CFO at Eli Lilly and Company, took the reins from Alphabet’s previous finance chief, Ruth Porat, in July.
In a note published this week, Morgan Stanley analysts said that “management change creates opportunity” and offered some suggestions about how Alphabet can give investors a better idea of the business’s performance.
They wanted more visibility into the performance of certain parts of Google’s business, such as AI and subscriptions, which are increasingly becoming bigger businesses for Google. They also wanted to know just how much of Google’s investments in generative AI show signs of life.
AI: Give us the data!
Like many of its rivals, Alphabet is investing heavily in AI right now. In Q2, the company said its capital expenditure — primarily the spend on servers and data centers — had nearly doubled year-on-year. Investors want to know how much this translates into improved user engagement with Google’s various products.
The analysts pointed out that Meta has provided Wall Street with specific percentages where certain products, such as Reels, have gotten more engagement. Google, by comparison, is often more vague when it comes to stats on how its products are doing with users. That’s particularly the case with new products, such as Circle to Search and AI Overviews. Give us the numbers!
Google’s free cash flow
Nothing gets investors more excited than three simple words: free cash flow. The more free cash these companies have, the more they can pay debts, make acquisitions, and pay out dividends.
Morgan Stanley investors want to see Google put some “guardrails” around free cash flow by being less ambiguous about how much money it intends to invest in businesses like AI. In Google’s Q2 earnings call, Porat said to expect the quarterly capital expenditure throughout 2024 to be “roughly at or above the Q1 Capex of $12 billion.”
Morgan Stanley analysts say this is still too ambiguous. They want Google to offer clearer and more specific guidance on the future.
Google’s growing subscriptions business
Analysts recently told BI they would like to see Google talk more about how much money it’s making off various subscriptions, which are becoming an increasingly important part of its business.
The Morgan Stanley analysts also said they would like to see Google separately report earnings from YouTube’s advertising and subscriptions.
Google’s paid subscriptions, much of which came from YouTube’s subscriptions, generated $15 billion of annual revenue, per CEO Sundar Pichai earlier this year. Meanwhile, Alphabet reported that YouTube ads generated over $31 billion in revenue in 2023. Since Alphabet only broke out ads revenue, Morgan Stanley said Google’s disclosures for YouTube could actually be underselling the size of the overall business by around 50%.
The same goes for Google Cloud and Workspace. Alphabet began disclosing its Cloud earnings in 2021, yet it doesn’t break down the split between Google Cloud Platform and Workspace. More transparency is becoming particularly important as Google offers more AI tools through both parts of the business.
The analysts said that “consistent disclosure” would help the market understand how Google is executing compared to rivals Amazon Web Services and Microsoft Azure, especially “through this critical GenAI period.”
Tell us how Google actually helps people
Finally, the analysts called on Google to “take the public narrative back” by highlighting its positive impacts on society. Right now, Google is embroiled in its second antitrust lawsuit with the US Department of Justice over its ad business (the first focused on Search, and the court found that Google violated antitrust law and maintained a monopoly).
Morgan Stanley analysts said Google has an opportunity to “be more assertive” about “promoting its positive impact” on users and partners, similar to Amazon.
Amazon “frequently publishes press releases detailing the number of jobs it has created, investment in local communities and revenue it enables for third party sellers as examples,” the analysts wrote.