• Google reported Mar-18 results effectively in-line with the Street. The company does not provide guidance.
• Most notable on the earnings call was CEO Sundar Pichai’s comment that search (90% of Google’s revenue) relies heavily on keywords and less on private data, reassuring that in a stricter privacy environment, Google’s core business should largely be safe.
• The company did not comment if they expect a stricter privacy oversight environment in the future.
• Google stayed heavy on the AI theme for the sixth consecutive quarter, mentioning it 25 times vs. 18 last quarter.
• While AI can be an abstract concept, it’s currently used in almost every Google product and service today and will be increasingly in the future.

Net revenue growth continues at impressive clip. While investors have largely viewed the Mar-18 quarter as a mixed bag, we believe the key takeaway is that the company continues to defy the law of large numbers when it comes to revenue growth. Specifically, net revenue growth of 23% is in line with growth over the previous six quarters (21-24% range), despite the fact that Google’s revenue run rate has increased by about 73% during that time.

The elephant in the room, GDPR. The anticipation around Google’s earnings call was centered on the company’s reaction to concerns about the use of personal data in the wake of Facebook and, more importantly, how data privacy will impact the Google brand and monetization going forward. The company indicated on the call that they will be fully compliant with GDPR which they have been working toward for the past 18 months. They stopped short of speculation regarding potential changes.

Search as a safe haven. Our biggest takeaway was Sundar confirming that search relies less on personal data and more on keywords. The reason for this is, rather than relying on tracking personal data and inferring, the user offers a query that determines intent. This perspective should provide some insulation to Google’s earnings multiple as investors will continue to brace for a stricter privacy regulatory environment over the next year.

Moving AI from abstract to concrete. Google, more than any other company, throws around the term “AI.” It’s for good reason, given that artificial intelligence enhances almost all of their products and services. Take, for example, a simple search – AI can tie in the location of the search query to yield a more contextually aware answer. What is trending on Google search can influence recommendations on Youtube. Some more obvious AI use cases are natural language processing with Google Home and Assistant, Google Photos’ computer vision that is able to recognize your friends and pets, and Waymo’s self-driving software that can safely operate a vehicle on public roads. In the future, more advanced AI will improve the quality and ubiquity of all of these experiences. At the end of the day, we’re delighted that Google can’t stop talking about their progress in AI.

We believe Waymo will eventually be Google’s third largest business. Google reported respectable progress in the race for autonomous vehicles with its recent disclosure of Waymo’s 5 millionth mile on public roads, with the last million coming in the Mar-18 quarter. It’s hard to quantify who the number two player is in miles driven, but safe to say Waymo’s lead is sizable. We think this lead will eventually translate into a full-scale business of an autonomous ride-hailing network and an operating system that can be used across other platforms. Apparently, Cloud is their third largest business and accounts for about 5% of revenue. While we expect healthy (35-45%) growth over the next several years, we anticipate the Waymo opportunity will surpass Cloud in terms of gross revenue over the next decade. It’s too early to determine how Waymo will stack up in terms of profitability. This suggests that in 2028, Google’s four largest segments will be Search, YouTube, Waymo, and Cloud.

Tracking Google’s AI focus. Over the past six quarters, we have tracked how many times presenters and analysts have made comments about AI including instances of words like AI, artificial intelligence, machine learning, natural language processing, or Tensor Flow.

Over the same timeframe, we have noted Sundar’s opening remarks and the urgency with which he brings up Google’s efforts in AI. In each of the last six quarters, AI is mentioned in the first several sentences. Below is a look at his opening remarks over time.