Alphabet – Another Quarter’s Strong Growth Leaves Behind A Brewster Problem

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Alphabet Inc (NASDAQ:GOOGL)reported first quarter revenues of $65.1bn, modestly ahead of market expectations and up 41.0% year-on-year. Growth was spread across all regions, with no geographic division delivering year-on-year growth of less than 38%, and driven by very strong growth in advertising revenues.

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A 26.1% increase in operating costs led to an improved operating margin and operating profits rose 87.6% to $21.0bn, well ahead of market expectations.

Google Services, which includes Search as well as YouTube, Android and Google Play, continues to account for the lion’s share of both revenues and profits, at $59.9bn and $24.0bn respectively.

Google Cloud saw revenues rise 44.9% to $5.0bn, with an operating loss of $644m. Other Bets reported revenues of $182m and a $1.2bn loss.

Alphabet reported free cash flow of $18.7bn in the quarter, up from $11.6bn a year ago. The group finished the quarter with net cash of $127.7bn versus $122.8bn at the start of the year. That was despite repurchasing $12.6bn of shares during the quarter.

Alphabet shares were broadly flat in aftermarket trading.

Alphabet Generates Free Cash Of $18.7bn Every Three Months

Nicholas Hyett, Equity Analyst at Hargreaves Lansdown:

“In the 1985 film Brewster’s Millions, a minor league baseball player must spend $30m in thirty days in order to inherit an even vaster fortune. Google faces a similar challenge.

Another quarter of stellar growth and even stronger margins mean Alphabet is now generating free cash of $18.7bn every three months. That means that even after all its current investments, which range from driverless cars to biotech, the group would need to spend an extra $6bn+ a month just to break even. It’s a Brewster threshold the group will struggle to reach. There simply aren’t enough profitable projects in which the group can invest its embarrassment of riches.

That’s certainly a nice problem to have, but it does leave us wondering what it intends to do with the nearly $130bn of cash it has lying around. Buying back $12bn of stock a quarter has barely put a dent in it.”

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