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Sydnee Gatewood
Sydnee Gatewood
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Ruane Cunniff Comments on Alphabet

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February 26, 2021 | About:

Alphabet's (NASDAQ:GOOG)(NASDAQ:GOOGL) revenue grew 13% in 2020, to $182 billion. The primary drivers of the company's strong growth were the usual suspects of search (+6%), YouTube advertising (+31%), and Google Cloud (+46%). During the first few months of the pandemic, a sharp spending pullback by advertisers negatively impacted search and YouTube, but as advertising activity recovered through the second half of the year, both businesses exited 2020 with excellent momentum.

Impressively, Alphabet managed to expand margins in 2020 – a year in which usage of nearly every ad-supported Google service exploded at the same time that many advertisers slashed ad budgets. Operating margins of 23% reflect a combination of outstanding operational agility and cost discipline within Alphabet's core businesses and improved operating leverage at Google Cloud. In the fourth quarter, the company disclosed operating results in its Cloud business for the first time. While we knew the business was not yet profitable, we were surprised by the magnitude of the losses today. Cloud lost over $5 billion in 2020, a figure which mostly reflected the significant fixed costs of building a global data center footprint and a product portfolio of hyperscaler quality and scope. We are pleased with the extraordinary sales momentum Google Cloud saw in 2020, a year in which Google Cloud Platform nearly tripled the size of its revenue backlog, and we believe the significant operating leverage inherent in the business model will carry margins higher as the business scales.

Alphabet entered 2020 as Sequoia's largest position. Although it declined along with the broader market in the spring, it held up better than many other companies, and as a result, its weight in Sequoia increased. In response, we trimmed our position and used the proceeds to add to existing and new investments that, in our estimation, were more attractive.Today, Alphabet's weight is nearly half what it was at the end of 2019, yet Alphabet remains our second largest holding.

From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund 2020 annual report.


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