ii view: Alphabet stock rallies as ad slowdown could have been worse

Despite a ramped-up share buyback programme, we have little guidance for the second quarter.

First-quarter results to 31 March 2020

• Revenue up 13% to $41.16 billion
• Net income up 2.7% to $6.84 billion
• Earnings per share up 3.9% to $9.87

Chief executive Sundar Pichai said:

“Given the depth of the challenges so many are facing, it’s a huge privilege to be able to help at this time. People are relying on Google’s services more than ever and we’ve marshalled our resources and product development in this urgent moment.

“Performance was strong during the first two months of the quarter, but then in March we experienced a significant slowdown in ad revenues. We are sharpening our focus on executing more efficiently, while continuing to invest in our long-term opportunities.” 

ii round-up:

Online advertising giant and Google-owner Alphabet (NASDAQ:GOOGL) reported sales which beat coronavirus-crimped analyst estimates in these latest quarterly results.

Total sales or revenue of $41.16 billion exceeded forecasts nearer to $40 billion.

Alphabet shares rose by more than 3% in after-hours US trading, having fallen by more than 7% year-to-date. 

Advertising sales gained by just over 10% compared to a gain of 17% in the previous quarter. While engagement with the internet jumped as the world moved online under Covid-19 lockdowns, companies initially looked to conserve cash wherever possible, which appears to have included online advertising.

Management declined to offer detailed guidance for the second quarter, only noting that it will be “difficult.”

Revenue from its much smaller cloud data server business jumped by 52% to $2.77 billion. Here, Alphabet competes against rivals such as Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).

Measures being taken to help combat the global economic downturn from Covid-19 include reduced 2020 capital expenditure, lower staff recruitment and curtailed marketing spend. 

However, its share buyback programme had been ramped up with it purchasing $8.5 billion of its own stock in this first quarter compared to $6.1 billion in the final quarter of 2019. 

ii view:

If Apple is smartphones and Microsoft operating and business software, Alphabet Google is synonymous with the internet and the ability to search its endless data. A company's ability to advertise and display their services using its technology has underwritten phenomenal growth.

In 2020, while Covid-19 has not brought this mammoth advertising machine to a shuddering halt, it may have caused it to misfire. 

For investors, the hit to advertising and the lack of management guidance for the next quarter clearly offer reason for caution. But the company’s significant share buyback programme offers support, while a forward price/earnings (PE) ratio below the three-year average brings some potential medium to longer-term value enthusiasm. 

Positives

• Alphabet and Facebook dominate the digital advertising market
• Management believes Artificial Intelligence offers enormous opportunities ahead
• Total cash and cash equivalents held of $117 billion

Negatives

• Cloud business trails both Microsoft’s & Amazon’s in size
• Technology giants suffering increased global government scrutiny
• No current dividend payment

The average rating of stock market analysts:

Strong buy