Alphabet – A Well-Heeled Spectator Of The Flight To Value

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Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL)’s first quarter revenues rose 26.0% to $68.0bn, ignoring the effect of exchange rates, and this was broadly in-line with analyst expectations. The performance was driven by growth in all divisions. Operating profit rose 22.2% to $20.1bn.

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The core Google Services business, which includes Google Search and YouTube ads, saw revenues rise to $61.5bn from $51.2bn. Total advertising revenue rose 22.3% to $54.7bn. Google Services profit rose from $19.5bn to $22.9bn.

The Cloud business saw revenue climb almost 44% to $5.8bn, while operating losses narrowed $43m to $931m.
Operating losses increased slightly in Other Bets to $1.2bn.

Traffic acquisition costs rose 23.5% to $12.0bn. Headcount rose to around 164,000 from 140,000.

Alphabet generated $15.3bn of free cash flow and net cash was $119.2bn.

The shares fell 4.7% in after-hours trading.

Alphabet's Earnings

Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown: 

“Prior to the latest results, Alphabet had lost $237bn of market value so far in April, as investors sprint away from growth stocks thanks to rising interest rates. That’s partly why the shares are being so severely punished for what is a good set of results. While it’s true the macro environment isn’t supportive, the Google parent doesn’t deserve to be part of the ongoing sell off. To be frank, net cash of $119bn swashing around the balance sheet means Alphabet can more than afford to be a spectator at the ongoing flight to value without worrying about long-term damage.

Inflation-beating investments tend to be those that offer consumers and society an indispensable service. If the Google search function was switched off tomorrow, the world would have something to say about it. And therein lies Alphabet’s biggest pulling power – advertisers are going to continue using Google for their marketing needs. That said, the ongoing crisis in Ukraine and general economic nervousness may mean Alphabet isn’t shielded from further volatility, and ups and downs are to be expected.

The tech sector could do with some good news following Netflix’s dramatic fall from grace, and looking beyond the noise, Alphabet has done just that. As inflationary pressures mount, companies will look to save on costs, and digital ads are much cheaper than above-the-line media tactics. Alphabet also doesn’t face the same competition as social media platforms vying for marketing spend.

Looking at the numbers, operating profits are still primed to bounce in the future as Google Cloud gathers pace. A slowdown in the number of companies working from home full time could temper growth here, but as a long-term source of margin accretion it’s still an area to be very excited about.

The group’s valuation is also worth real consideration, with a price to earnings ratio of around 20, Alphabet’s long-term and resilient revenue model isn’t fully reflected. As the tech sell off is unlikely to cease overnight, it’s worth considering the adage that price is what you pay, value is what you get.”

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