Following the company’s Q2 earnings release, Google shares are down 3%, based on higher traffic acquisition costs (TAC). As a percentage of revenue, TAC increased to 11.1%, up from 8.8% a year ago. We think this is a classic example of investors looking at the near-term bumps rather than the long-term positives. We saw several positive themes in the quarter:

1. Revenue growth has been stable over last 5 quarters. Google’s revenue grew 21% y/y. Over the last five quarters, revenue has grown between 20-22%, even though there has been anticipation that revenue growth would slow.
2. AI is having a positive impact on Google. Sundar Pichai began his portion of the earnings call by saying: “Google continues to lead the shift to AI driven computing.” This was the third consecutive earnings call in which Sundar touched on AI during his commentary. In Q1 of this year, he said: “I’m really happy with how we are transitioning to an AI-first company.” In Q4 of 2016, Sundar stated: “Computing is moving from mobile-­first to AI­-first with more universal, ambient and intelligent computing that you can interact with naturally, all made smarter by the progress we are making with machine learning.” Google mentioned “AI” or “Machine Learning” 18 times during the Q4’16 call, 24 times on the Q1’17 call, and 21 times on the Q2’17 call. The focus on AI is important because AI will empower Google to have better, more targeted search results for consumers, higher ROI for advertisers (through Google’s smart bidding platform), lay the groundwork for natural language processing (the future of Google Home and Assistant), and improve computer vision-based search.
3. Google remains heavily invested in the AR/VR theme. Google Lens, a computer vision platform driven by machine learning, is the foundation of Google’s future in Augmented Reality. Google is taking the long-term approach to Google Lens, as new computing form factors emerge (ie. AR Glasses) that lend themselves to input methods more natural than taking out a phone and snapping a picture. In addition, Google shared that by year end, there will be 11 Daydream-ready devices on the market. Most notable, Samsung’s Galaxy S8 and S8+ are Daydream-ready.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.