ii view: Google owner Alphabet beats estimates

This tech titan fell by close to 40% in value last year but has partially recovered in 2023. Buy, sell, or hold?

First-quarter results to 31 March

• Revenue up 3% to $69.8 billion
• Adjusted earnings per share down 5% to $1.17

Chief executive Sundar Pichai said:

“We are pleased with our business performance in the first quarter, with Search performing well and momentum in Cloud. We introduced important product updates anchored in deep computer science and AI."

ii round-up:

Google owner Alphabet Inc Class A (NASDAQ:GOOGL) detailed sales and earnings which beat Wall Street hopes as it focused down on improving efficiency. 

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Earnings per share fell 5% to $1.17 but surpassed analysts’ forecasts for the first time in five consecutive quarters, and followed its previous decision to cut around 6% of its workforce, or 12,000 staff. 

Shares in the Nasdaq 100 mammoth gained around 4% in after-hours trading having come into this latest news up around 16% year-to-date. That’s similar to fellow tech-titans Microsoft Corp (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) and in comparison to a 6% gain for the broader S&P 500 index. 

Overall, Alphabet revenue rose 3% to $69.8 billion, topping forecasts nearer to $68.8 billion, helped by a 27% gain in sales for its Cloud data business to $7.45 billion.

Advertising related sales proved flat at $54.55 billion, with customers potentially remaining cautious in their spending budgets given the backdrop of an economic slowdown and elevated inflationary costs.

The first-quarter results came just a week after Alphabet announced part of its Google Research team would collaborate with its DeepMind team to significantly accelerate progress in Artificial Intelligence, or AI. The move comes after Windows software maker Microsoft in 2022 launched its AI-based chatbot ChatGPT. 

Alphabet results also followed its recent decision to allocate $70 billion towards its share buyback programme, unchanged from the same quarter last year. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares following the numbers, highlighting its belief for the potential of its AI business going forward. 

ii view:

Employing over 190,000 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 including YouTube. Google Cloud competes against Amazon’s Web Services division and International Business Machines Corp (NYSE:IBM), while its Other Bets division encompasses both its self-drive business Waymo and its life sciences unit Verily. 

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For investors, elevated costs and an uncertain economic outlook are likely keeping advertising spending among corporate customers contained. Rivals for business such as TikTok and Tesla Inc (NASDAQ:TSLA) are competing hard against YouTube and Waymo. Government concerns regarding monopolistic powers have also not disappeared, while the broader development AI remains under wide scrutiny. 

On the upside, there's diversity of business types and geographic regions, and Alphabet's Cloud business generated a profit of $191 million in this latest quarter compared to a loss of $480 million in the previous quarter. Costs are also being cut, ownership of the mobile phone Android operating system leaves it less dependent than say Meta Platforms Inc Class A (NASDAQ:META) on the metrics set by Apple Inc (NASDAQ:AAPL), such as advertising privacy, while shareholder returns remain in focus. 

On balance, and while some caution is sensible given wider market and economic uncertainty, a consensus analyst estimate of fair value at over $125 per share continues to reflect optimism longer term. 

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:

Buy