ii view: Google owner Alphabet working hard to sell its AI tech

Fourth-quarter results to 31 December

• Revenue up 13% to $86.3 billion
• Adjusted earnings per share up 56% to $1.64

Ruth Porat, President and Chief Investment Officer said:

“We ended 2023 with very strong fourth quarter financial results. We remain committed to our work to durably re-engineer our cost base as we invest to support our growth opportunities.”

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ii round-up:

Google owner Alphabet Inc Class A (NASDAQ:GOOGL) detailed forecast beating earnings as part of its drive to improve efficiency, but did admit to marginally disappointing advertising related sales.

Fourth-quarter earnings of $1.64 per share beat Wall Street hopes for $1.60, helped by a $864 million profit for its cloud data business compared to last year’s loss of $186 million, and a continued focus on containing costs. However, sales of $65.5 billion at its core advertising business missed forecasts of $65.9 billion, hindered by slower-than-expected growth at its YouTube business, a rival to TikTok. 

Shares in the Nasdaq 100 company fell around 7% in post-results trading having come into this latest news up 58% in 2023. That’s similar to fellow cloud data hosting business Microsoft Corp (NASDAQ:MSFT), although far short of a near 200% gain for rival ad selling tech giant and owner of Facebook, Meta Platforms Inc Class A (NASDAQ:META).

Accompanying comments from chief executive Sundar Pichai flagged the benefit each of its businesses was now enjoying from its artificial intelligence (AI) related investments and innovation, with the best yet to come given its December launch of AI language Gemini. 

Alphabet plans to license Gemini to its customers via its installation on Google Cloud for them to use within their own software applications. 

Sales at Google Cloud climbed 26% year-over-year to $9.2 billion, with revenue at its other businesses division, which includes its self-drive Waymo unit, almost trebling to $657 million. 

Full-year 2023 profit rose 13% to $84.3 billion, helped by around 12,000 job losses and a rejig of its property portfolio. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on Alphabet shares post the results. First-quarter numbers are likely to be announced late April or early May.  

ii view:

Started in 1998 under the Google brand, the company today operates 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 the likes of Amazon.com Inc (NASDAQ:AMZN), Oracle Corp (NYSE:ORCL), and International Business Machines Corp (NYSE:IBM), while its Other Bets division also includes its life sciences unit Verily.  

For investors, competitors such as TikTok have grown popular with younger online viewers, likely pressuring ad sales at Alphabet’s YouTube business. Competition elsewhere such as that at Tesla Inc (NASDAQ:TSLA) for self-driving vehicles and Waymo cannot be overlooked. The debate over appropriate tech valuations also persists, while fears that AI could encroach on Alphabet’s search engine business now warrant consideration.  

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To the upside, Alphabet's previous success in allowing other companies such as Samsung to use its Android mobile phone software potentially offers a template for its new AI language, Gemini. A diversity of both business types and geographical operating regions exists, a focus on cost containment is ongoing, while its search engine business, at least for now, remains the go-to place for corporate advertising. 

Despite continued risks and the expense of developing AI, there's a lot to like about the Alphabet business, and an analyst consensus fair value estimate above $155 per share adds further confidence to investors with belief in this US tech leader.    

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