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ii view: Google owner Alphabet delivers double-digit growth

An unrivalled search engine business, a growing Cloud data server division and other interests including self-driving car unit Waymo. Buy, sell, or hold?

24th July 2024 15:53

by Keith Bowman from interactive investor

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Second-quarter results to 30 June

  • Revenue up 14% to $84.7 billion
  • Adjusted earnings per share up 31% to $1.89
  • Dividend of $0.20 per share, unchanged from the previous quarter

Chief Executive Sundar Pichai said:

“Our strong performance this quarter highlights ongoing strength in Search and momentum in Cloud. We are innovating at every layer of the AI stack. 

“Our longstanding infrastructure leadership and in-house research teams position us well as technology evolves and as we pursue the many opportunities ahead.”

ii round-up:

Google owner Alphabet Inc Class A (NASDAQ:GOOGL) detailed growth in sales and profits broadly matching Wall Street hopes as it continued to embed artificial intelligence across its services. 

Second-quarter sales at its core Google search and advertising business rose 11% year-over-year to $64.6 billion. Ad demand for YouTube within this core business fell marginally shy of analyst forecasts, climbing 13% to $8.7 billion.

Shares in the Nasdaq 100 and S&P 500 giant is down around 5%, having come into this latest news up by close to a third year-to-date. That’s ahead of a near one-fifth gain for the tech-heavy Nasdaq 100 index in 2024. AI chipmaker NVIDIA Corp (NASDAQ:NVDA) is up 140% year-to-date. 

Sales at Alphabet’s Cloud business, providing data servers to host software for customers such as banks and competing against rivals Microsoft Corp (NASDAQ:MSFT) and Amazon.com Inc (NASDAQ:AMZN), rose 29% year-over-year to $10.3 billion. The first time it's exceeded $10 billion. 

Profit on a divisional basis climbed by just over a quarter at its core Services division and including search, advertising, YouTube and Google devices, to $29.7 billion. Cloud related profit grew almost three-fold to $1.17 billion, breaching $1 billion for the first time ever. 

Losses for its remaining Other Bets division, and including its self-drive Waymo business, a competitor to Tesla Inc (NASDAQ:TSLA), rose to $1.13 billion compared to a loss of $813 million this time last year.   

Overall group adjusted earnings rose 31% from a year ago to $1.89 per share, beating analyst forecasts of $1.84 per share. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on Alphabet shares post the results, flagging a forecast fair value of $205 per share. 

ii view:

Started in 1998, Alphabet last year generated total sales of just over $307 billion. Geographically, North America accounts for its biggest slug of sales at close to half, followed by Europe, the Middle East and Africa (EMEA) at around 30%, Asia-Pacific 17%, and Latin America most of the balance.  

For investors, rivals to its YouTube business such as TikTok are competing hard and finding favour with younger audiences. The uncertain economic outlook and raised geopolitical tensions may be generating some caution around advertising spending corporate customers. Spending on AI developments does not guarantee future leadership or success, while fears that AI could encroach on its search engine business also warrant consideration. 

To the upside, spending on AI developments is ongoing with group-wide capital expenditure of $13.2 billion this latest quarter part of an estimated $52 billion for al of 2024. A focus on costs persists, including a previous rejigging of its office portfolio. Diversity of both business type and geographical coverage also exists. 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) for advertising privacy, while its focus on shareholder returns has increased given a recently introduced dividend payment.  

On balance, and despite ongoing risks, this online advertising giant looks to remain worthy of its place in many already diversified investor portfolios.  

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

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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