Alphabet: Shares Rise on Significant Revenue Beat

Written by: Sophie Lund-Yates | Hargreaves Lansdown

Alphabet's second quarter revenues rose 32% to $75.3bn in the fourth quarter, better than expectations of $72.1bn. The performance was driven by growth in advertising, and Google Cloud. Operating profits of $21.9bn were 29% ahead of last year. 

There was a $446m benefit to net income as Alphabet reassessed the lifespan of its server and networks equipment upwards. 

The core Google Services business, which includes Google Search and YouTube ads, saw revenues rise to $69.4bn from $52.9bn. Total advertising revenue was up 32.6% to $61.2bn. Google Services profit was $26.0bn compared to $19.1bn. 

The Cloud business saw revenue climb 44.6% to $5.5bn, while losses narrowed from -$1.2bn to -$890m.  

Operating losses widened by over $300m in Other Bets, with revenue also falling slightly to $181m. 

Traffic acquisition costs rose to $13.4bn from $10.5bn and over there are over 21,000 more Alphabet employees.

Alphabet generated $18.6bn of free cash flow and net cash of $124.8bn. 

Alphabet also announced a 20-for-one stock split. This comprises a one-off stock dividend, and pending shareholder approval, would see existing shareholders receive a dividend of 19 extra shares for every share held. 

Alphabet shares rose 7.8% in after-hours trading. 

It’s important not to beat around the bush where Alphabet is concerned. The scale of its combined advertising businesses cannot be overstated. If you own a business in today’s world, chances are you will need to pay to get that marketing material in front of Google or YouTube’s users. Positive consumer behaviour has fed into an incredible performance, and the market is rewarding Alphabet in response. The pandemic has handily accelerated the world’s reliance on digital advertising too – sitting through traditional TV advert breaks, or reading billboards suddenly feels completely archaic in the age of streaming and mobile phone addiction. The market is also reacting to news of the stock spilt, which is not only an indication of confidence from management, but will mark a more affordable entry point for investors. 

The profitability of the core advertising operation has also allowed Alphabet to chivvy up an even more exciting product. Google Cloud has the potential to do what Amazon Web Services has done for the retail giant – revolutionise the earnings engine driver. From a profit perspective, Google Cloud has a little way to go before it can pad out the bottom line, although losses are narrowing. And once the costs of the new mammoth infrastructure are covered, operating leverage dynamics means earnings will jump, pretty much instantly. 

Prior to results, Alphabet shares were flat for the last 6 months, meaning it’s managed to avoid the worst of the tech sell off but not fully avoided subdued sentiment. The sector is unlikely to have seen the worst of the pain, and Alphabet is by no means immune from that. Not to take away from the impressive gains seen in recent days, but continued swings are all but guaranteed as the NASDAQ finds where to settle as fatalistic inflation concerns rumble on. However, a company with well over $100bn of net cash swashing around the balance sheet, while not protected from taking on some muddy water, is more than capable of staying afloat as macro tides change.

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