Internet giant Alphabet, owner of Google reported better than expected in second quarter earnings after the close Tuesday. $GOOG reported adjusted earnings per share of $1.44, ahead of the $1.34 expected by a Refinitiv survey. Revenue for was $74.6 billion, beating a consensus estimate of $72.82 billion, the second straight quarter of accelerating growth following. Cloud revenue grew 28% year-over-year and reported operating income for the second quarter in a row ahead of expectations. Shares of Alphabet rallied more than 6% to $130. The results showed growth in YouTube and search-advertising revenue despite a tough ad climate.
Alphabet’s messaging about its AI positioning excited analysts, especially in terms of the company’s cloud business. Bernstein’s Mark Shmulik said “the AI commentary was helpful to demonstrate progress with account wins and why revenue growth held at 28% [year over year] despite continued client optimization efforts.”
“There’s exciting momentum across our products and the company, which drove strong results this quarter,” Pichai said in the release. “Our continued leadership in AI and our excellence in engineering and innovation are driving the next evolution of Search, and improving all our services.”
Alphabet Q2 23 Earnings
Q2 2023 earnings released after close 4:00 p.m.; conference call to follow
- Operating income of $21.8 billion, up 12% from a year earlier.
- Adjusted earnings per share of $1.44, beating a consensus estimate $1.34 expected by Refinitiv
- Revenue $74.6 billion, beating a consensus estimate of $72.82 billion.
- Revenue in the Google Search & other category rose 4.8% to $42.63 billion,
- YouTube ads revenue rose 4.4% to $7.67 billion.
- Google Network revenue fell 5% to $7.85 billion.
- Google Cloud revenue rose 28% to $8.03 billion and reported record operating income of $395 million, compared to an operating loss of $590 million in the second quarter of 2022.
GOOG: Stock Market Reaction
- $129.975+7.185 (5.85%)
- $129.975 +24.535(23.27%) Over year
- $129.975 +67.571 (108.28%) Over 5 years
- 52wk High $131.37
- 52wk Low $83.45
CFO to change role
The company also announced that chief financial officer Ruth Porat would assume a newly created president and chief investment officer position. Porat will remain in the role until a successor is identified, the company said in a press release.
“In her new role, Ruth will strengthen our collaboration with policy makers and shape our corporate investments to have maximum economic impact for people and economies around the world,” CEO Sundar Pichai said in the news release.
Google Cloud
Google Cloud has become a key focus given the competitors like Microsoft Azure and Amazon Web Services. Google Cloud is a seamless multi-cloud with Google Maps, Google Assistant, Google Play, YouTube and Google Shopping. This offers a unique value proposition for enterprises given its ability to leverage consumer-related innovations. We are seeing results accordingly.
Google reported $8.03 billion in Google Cloud sales, compared to a StreetAccount consensus of $7.87 billion. The unit reported its second consecutive quarter of operating profit, with second period operating income of $395 million, compared to a $590 million loss in the year-ago quarter.
AI
Alphabet unveiling a raft of AI-infused products including a new version of its search engine at it’s annual developer conference in May. Products like the ChatGPT bot developed by Microsoft-backed OpenAI have weighed on Google this year. Today’s report on AI plans gave relief to investors helping the stock trade higher.
Google co-founder Sergey Brin, Alphabet’s second-largest individual shareholder, has recently been working with researchers at headquarters about three or four days a week on Gemini, its next big AI system, The Wall Street Journal reported last week.
Pichai said Tuesday that the new search engine was progressing ahead of expectations. The product, currently in limited testing, provides lengthy summaries in response to a range of queries and invites users to ask follow-up questions.
“You will see us continue to bring it to more and more users,” Pichai said on a call with analysts. “Over time, this will just be how search works.”
Pichai said Google would continue experimenting with ad formats in the new search engine in response to a question about whether the product would eat into sales. “We have a lot of experience working through these transitions,” he added.
Analysts Reaction: UPDATED
Over a dozen analysts upgraded their price target for Alphabet stock to $150 or higher following earnings FactSet showed.
Goldman Sachs analyst Eric Sheridan:
“While questions will remain about AI’s impact on core products (e.g. if such a shift can be disruptive over the short-term) or costs structure (e.g. if computing costs per search will rise), we see Alphabet as the leader in compounded AI investment in the past 5-6 years and well positioned to capitalize on this trend in the coming decade,”
SVB MoffettNathanson analyst Michael Nathanson
“[W]hile Generative AI has been the favorite tech buzzword of 2023, the truth is that Alphabet started integrating machine learning and artificial intelligence into their products and ad solutions close to a decade ago,” he wrote in a note to clients.
Alphabet has racked up $140 billion in research and development spending over the past five years, along with $125 billion in capital-expenditure spending, he noted, so “it would be laughable to think Alphabet isn’t prepared to benefit in a world of generative AI.”
Given years of AI infusion into Google products, “the near-term debate is on the upper bounds of near-term margin growth,” Nathanson continued. “We, and the market, have been rightly focused on the margin expansion narrative at Meta…but perhaps it is time to contemplate that Alphabet might be at the start of a similar run.”
Rosenblatt analyst Barton Crockett:
Alphabet is a “quality company rebutting AI fears” and raised his target from $132 to $163 after Alphabet proved competitors’ AI gains have yet to impact profit margins or search, contrary to early fears.
Jefferies analyst Brent Thill
Titled his note to clients, “Don’t Call It an AI Comeback,” calling out that the company has been “AI-first” for seven years. Raised the target from $150 to $165 and declared “Most checks pointed to a beat, and [Alphabet] did not disappoint, with a ~$2B gross [revenue] beat breaking some investors’ positioning as a favorite short and generative AI casualty.” Jefferies’ rating implies the company’s market capitalization will surge past $2 trillion for the first time in its history.
“We believe generative AI is starting to have a positive impact and was a factor in the beat,” Thill wrote of Alphabet’s upbeat cloud performance in the latest quarter.
Bernstein’s analyst Mark Shmulik
“The AI commentary was helpful to demonstrate progress with account wins and why revenue growth held at 28% [year over year] despite continued client optimization efforts.”
He maintained a market-perform rating and raised his price target to $135 from $130.
In other areas, though, he wondered if the company was being too aggressive, noting that Microsoft’s Bing lagged Google search in terms of ad growth rates in the June period. That raises the question “of why management believes they need to move as quickly as they are on Bard and SGE,” or the Search Generative Experience, a version of Google Search that plays up AI-driven responses.
“While this may well prove to be the optimal approach down the road, expect expenses and [capital expenditures to ramp to support AI ambitions,” he wrote.
Source: Google, TradersCommunity, WSJ
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