You might have seen China in the news lately. Its markets have sort of been in a meltdown to begin 2016, and circuit breakers have now cut trading days short for two days this week in Shanghai. Yesterday, the Chinese stock market was open for just 30 minutes.
With its masterful timing, Alphabet Inc (GOOG, GOOGL) has picked now to start investing more heavily in China. According to CNBC, the search giant is looking to hire more than 50 new employees in the country.
For the record, GOOG downplayed the importance of its hiring spree, calling the number of job postings in the region “about average for the past few years.”
That said, there are some solid indications that Google’s China ambitions are not quite as average as they make them out to be.
Could GOOG Be Seeking Real Growth in China?
Taking Google’s recent actions in context, it seems that the company is actually seeking some real growth in the communist country. From an economic perspective, it makes a lot of sense.
Yes, the Chinese stock market is in chaos, which makes Google’s push somewhat perplexing on the face of it. But take a look at the size of Alphabet: It’s worth over $500 billion. (Google is easily the largest component of Alphabet, accounting for about 90% of company revenues). By definition, Alphabet has to make some big moves to move that needle.
What bigger move is there than re-entering China?
GOOG exited the country in 2010, after China apparently tried to hack into its operations and censor content. Twitter (TWTR) is also banned in China, and Chinese search engine Baidu (BIDU) only owns the search market there because it tolerates censorship restrictions imposed by the Chinese government.
But morality comes with a large opportunity cost: Analysts expect BIDU to haul in about $10 billion in revenue in 2015. That represents more than 13% of the $74.4 billion analysts expect from GOOG. That’s a lot of incremental revenue for the taking.
Perhaps more importantly, revenue growth at Baidu should be 35% in 2015 — about three times the rate of revenue growth expected at Alphabet.
China is the world’s second-largest economy, and has the fastest-growing middle class on the planet by far. Newly installed Google CFO Ruth Porat, who was recruited from Morgan Stanley (MS) last year, is aggressively looking to cut costs (she’s done that), seeking revenue growth opportunities (she’s doing that) and doing what’s right for the company organizationally (see Alphabet).
Enter China.
Even if Google doesn’t outright re-enter the Chinese search market, it has plenty of other opportunities to pursue. In October, it bought a minority stake in the Chinese artificial intelligence company Mobvoi, which has developed a Chinese speech recognition and search app of its own, as well as an operating system for its own smartwatch.
Android, GOOG’s mobile operating system, is the preeminent OS in China, and Mobvoi has already partnered with its new investor to power the voice search function for Android Wear.
As a publicly traded company, navigating Chinese regulation and censorship may be increasingly necessary, and in the best interest of the GOOG stock price and revenue growth.
Bottom Line for GOOGL Stock
Although Google doesn’t break down its international revenues by country, we do know that the U.S. and U.K. are becoming smaller and smaller portions of the pie as GOOG evolves. In 2007, 67% of company revenue came from the U.S. and the U.K. (52% U.S., 15% U.K.). By 2014, they accounted for just 53% of revenues (43% domestically and 10% from the U.K.).
It won’t be long before the “rest of the world” segment constitutes the majority of revenue.
And given Google’s increasing focus on China, that day will be sooner rather than later.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
