Alphabet: Ad Scale and Cloud Make Alphabet a Port in the Sell-off Storm

Written by: Sophie Lund-Yates | Hargreaves Lansdown

Second quarter revenue rose 16% to $69.7bn, ignoring the effect of exchange rates, which was slightly behind analyst expectations. Advertising revenue rose to $56.3bn from $50.4bn, reflecting growth across Google Search, YouTube and Google Network. 

Google Cloud saw revenue rise 35.6% to $6.3bn, while Other Bets was broadly flat at $193m. 

Traffic acquisition costs increased 11.8%, while employee headcount jumped around 30,000 to 174,014. 

Operating margins fell three percentage points to 28%, but the increased revenue meant operating profits came in $92m higher at $19.5bn. Losses across Other Bets and Google Cloud also widened, weighing on profits. 

Alphabet generated free cash flow of $12.6bn, while net cash stood at $110.3bn. 

The shares rose 3.0% in after-hours trading. 

Alphabet’s unshakeable presence in our daily lives means it falls into the essentials bucket for marketing teams, which is why ad revenues are still rising despite concerns of an overly-harsh tapering of demand. A positive reaction from the latest quarterly numbers has been incredibly hard-won given the negative market sentiment surrounding broader tech. 

Alphabet’s essential status for marketers makes it more able to stomach inflation, as its customer base is about as sticky as they come in the sector. However, it’s not completely immune to residual issues from a tough economic backdrop. Ad growth has slowed from the headier days of last year when Alphabet benefited from post-pandemic re-openings and a surge in consumer spending. Double digit growth from this new base most certainly shouldn’t be dismissed, but the fact Alphabet’s momentum has come off the boil should be a warning for advertising revenue everywhere.  

Of course, Alphabet has a mushrooming cloud business too. All those loyal users and marketing teams are primed to have a cloud computing subscription cross-sold to them. So, while Google’s younger operations here mean it’s still heavily loss making, the cloud is building sufficient steam that profits should be able to break through the mist within a reasonable timeframe, despite the mild disappointment in the recent numbers. 

The rise of short-form videos from the likes of TikTok or Instagram reels are vying for Alphabet’s important YouTube viewers, but at this juncture it doesn’t appear to be too much of a competition. 

It’s easy to debate the ups and downs, threats and opportunities of this tech giant, but the fact of the matter is, Alphabet has well over $100bn in net cash languishing on the balance sheet. Twists and turns in the economy may well be coming down the pipes, and even Alphabet won’t be fully immune, but it can more than stomach disruption while also throwing money at future profit-engines.

Related: Netflix: Subscriber Numbers Beat but Costs Raise Question