ii view: Google owner Alphabet misses Wall Street forecasts

Shares for this tech mammoth are down by more than a fifth during 2022. Buy, sell, or hold?

Second-quarter results to 30 June

• Revenue up 13% to $69.7 billion
• Earnings per share down 11% to $1.21

Chief executive Sundar Pichai said:

“In the second quarter our performance was driven by Search and Cloud. The investments we’ve made over the years in AI and computing are helping to make our services particularly valuable for consumers, and highly effective for businesses of all sizes. As we sharpen our focus, we’ll continue to invest responsibly in deep computer science for the long-term.”

ii round-up:

Google owner Alphabet Inc Class A (NASDAQ:GOOGL) detailed earnings below Wall Street forecasts as overall revenue growth slowed to 13% during the second quarter. That compares with the prior quarter’s 23% growth and is down on last year’s Q2 growth of 62%. 

Earnings per share of $1.21 missed analyst estimates of nearer to $1.28, with total revenue of $69.7 billion marginally shy of forecasts at $69.9 billion. YouTube ad revenue growth slowed to 5% during the period from last year’s second quarter growth of 84%, hit by a consumer emergence from pandemic lockdowns and likely competition from Chinese rival TikTok. 

However, Alphabet shares rose marginally in after-hours trading having come into this latest announcement down around 27% year-to-date. Shares for cloud data rival Microsoft Corp (NASDAQ:MSFT) are down by a similar amount during 2022, while the FTSE All World index has fallen by close to a fifth.

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Sales for Alphabet’s overall advertising business and including YouTube ads, broadly met analyst expectations, coming in at $56.3 billion and reassuring investors that its core business should remain resilient. Advertising related sales accounted for just over four-fifths of group revenue last quarter.   

Revenues for its Cloud data business climbed by just over third to $6.27 billion year-over-year, with its operating loss rising to $858 million from $591 million in the year ago quarter. Alphabet is battling hard in this area with rivals Amazon (NASDAQ:AMZN) and International Business Machines Corp (NYSE:IBM). 

Sales for its Other Bets division, which includes its self-driving car business Waymo, were flat at $193 million year-over-year, with losses rising by a fifth to $1.68 billion.  

Alphabet shares only recently underwent a 20 for 1 stock split. In April, the California headquartered company announced a new $70 billion annual share buyback programme, up from the previous year’s $50 billion.  

Broker Morgan Stanley retained its overweight stance on Alphabet following the results, highlighting that the shares do not look expensive trading on a multiple of 10 times 2023’s estimated adjusted profit (EBITDA), although attention needs to be kept on its high margin search advertising business. 

ii view:

Employing over 170,000 people, Alphabet operators across the three divisions of Google services, Cloud and Other Bets. Services includes its hardware, Google maps and Google play services, along with its core search adverting business. Subscription fees for YouTube Premium and YouTube TV also feed into the services mix. 

For investors, rising costs and an uncertain economic outlook could see Alphabet corporate customers reduce their advertising spend. The pandemic proved that Alphabet’s core advertising business is vulnerable to sudden economic confidence shocks, as quarter two’s ad sales fell for the first time. Government concerns regarding monopolistic powers persist, while competition from the likes of TikTok should not be overlooked. 

On the upside, Alphabet’s strength in the online advertising space remains clear, and Google continues to be a firm advertising favourite for corporations globally. Unlike Meta (NASDAQ:META) and Snap (NYSE:SNAP), Alphabet’s ownership of the mobile phone Android operating system also leaves it less dependent on metrics set by Apple (NASDAQ:AAPL) such as advertising privacy. Shareholder returns are a focus, while its recent share split leaves the shares more affordable for many investors.

In all, and with the analyst consensus estimate of fair value currently sat at over $140 per share, long-term support for this tech icon looks likely to persist. 

Positives

• Alphabet dominates the digital advertising market
• Executing share buybacks

Negatives

• Uncertain economic outlook
• Technology giants remain under global government scrutiny

The average rating of stock market analysts:

Strong buy