alphabet earnings

Alphabet (NYSE: GOOG) stock is trading higher in early US price action today despite missing second-quarter earnings estimates. The company had missed revenue estimates in the first quarter as well, as YouTube revenues fell short of analysts’ estimates.

Alphabet posted revenues of $69.5 billion in the quarter which was 13% higher than the corresponding period last year. On a constant currency basis, Google-parent’s revenues increased by 16%. Other US tech companies are also battling currency headwinds. Microsoft also took a four-percentage point hit in its fiscal fourth quarter of 2022. Like Alphabet, even Microsoft stock is trading higher today as markets gave a thumbs up to its fiscal 2023 guidance.

Coming back to Alphabet’s earnings, YouTube’s revenues came in at $7.34 billion in the quarter which was below the $7.52 billion that analysts were expecting. In the previous quarter also, YouTube revenues were also below street estimates. More importantly, in the second quarter, Alphabet reported cloud revenues of $6.28 billion which were below the $6.41 billion that analysts were expecting.

Cloud has been a growth area for companies like Alphabet and Microsoft. Even Amazon, which reports later this week, gets most of its profits from the cloud business. Amazon AWS leads the cloud market.

Commenting on the earnings, Alphabet’s CEO Sundar Pichai said, “In the second quarter our performance was driven by Search and Cloud. The investments we’ve made over the years in AI and computing are helping to make our services particularly valuable for consumers, and highly effective for businesses of all sizes. As we sharpen our focus, we’ll continue to invest responsibly in deep computer science for the long-term.”

Alphabet’s full-time employees rose 21% YoY to 174,014 in the quarter. However, the company has also been impacted by the economic turmoil and is going slow on hiring.

Key Takeaways from Alphabet’s Earnings

Alphabet’s advertising revenues increased 12% to $56.3 billion in the quarter. The ad industry is suffering from a sharp slowdown. Snap recently warned of a slowdown in ad spending amid the macroeconomic turmoil. While Alphabet did not provide guidance for the ad business, it did point to tough comps.

The company’s CFO Ruth Porat said “Going forward, the very strong revenue performance last year continues to create tough comps that will weigh on year on year growth rates of advertising revenues for the remainder of the year.”

Amid the uncertain economic environment, several US companies have been shying away from providing guidance. Meanwhile, the rise in Microsoft and Alphabet stocks reflects that markets have toned down their expectations from tech companies given the tough macro environment.

Barclays Maintains Its Overweight Rating on Alphabet Stock

Despite the earnings miss, Barclays maintained its overweight rating on the stock. In its note, it said, “Stepping back from the print, we think the next few quarters could be tough for all of digital advertising, but coming out of this print consensus numbers likely land close to the right neighborhood, and at 11x 2023E EV/EBITDA, still offers one of the best long-term risk/reward in tech, in our view.”

Most Wall Street analysts have a buy rating on Big Tech companies like Microsoft which have strong balance sheets and are better prepared to tackle the current slowdown. Meanwhile, while tech earnings are getting a lot of attention this week, markets would next look forward to the Fed’s rate hike decision later today.

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