Should You Ride the Alphabet FOMO Wave?

Source: Alphabet Earnings

1Q2024 Earnings Review

Most revenue metrics beat market expectations.

• Earnings per share: USD1.89 vs. USD1.51 expected

• Revenue: USD80.54 billion vs. USD78.59 billion expected

• YouTube advertising revenue: USD8.09 billion vs. USD7.72 billion expected

• Google Cloud revenue: USD9.57 billion vs. USD9.35 billion expected

• Traffic acquisition costs (TAC): USD12.95 billion vs USD12.74 billion expected

• Google's advertising grew by 13.04%, while the advertising segments for Meta and Amazon grew by 26.81% and 24% respectively during the same period. Despite this, Google's advertising growth remains impressive, marking its strongest year-over-year growth since 1Q2022.

• Google Cloud revenue increased by 28.44% year over year, compared to AWS's 17% and Microsoft Azure's 31% growth during the same period. Google Cloud's operating income surged by 371% year over year, but its operating margin remained stagnant at 9.4% over the last two quarters, in contrast to AWS's 37.63% in the latest quarter.

• Capital expenditures (capex) rose to USD 12 billion in the quarter, up from USD 6.2 billion in 1Q2023.

• The total traffic acquisition cost (TAC) as a percentage of Google advertising revenue remains healthy at 21%.

Generative AI:

• In February, Alphabet $Alphabet(GOOGL)$ integrated Gemini into Performance Max (Pmax). Advertisers utilizing PMax asset generation are 63% more likely to launch a campaign with Good or Excellent Ad Strength. Additionally, those who enhance their PMax Ad Strength to Excellent witness an average increase of 6% in conversions.

• Advertisers who use automatically created assets (ACA), which are supercharged with gen AI, see a 5% increase on average in conversions at a comparable cost per conversion in Search and Performance Max campaigns.

• However, Alphabet does not disclose the percentage of revenue attributed to Generative AI.

 Technical Analysis:

• Alphabet Inc. Class A experienced a gap up on Friday, followed by a subsequent drop in the following days, which could be attributed to gap-closing activities. Once the gap is closed at USD160.22, the stock may resume its uptrend.

• We do not consider the interim top at USD174.71 as a significant resistance level.

• We believe that the uptrend momentum is strong and may only encounter major resistance at Fibonacci Expansion levels of 100%, 127.2%, 141.4%, or 161.8%, corresponding to prices of USD184, USD212, USD226, and USD247 respectively.

Source: Tiger Brokers PC App

Conclusion:

• Alphabet surged by 10% last Friday following an earnings beat and the announcement of its first-ever dividend and a USD70 billion share buyback program. However, we perceive the earnings growth to be relatively underwhelming compared to other major tech companies such as Amazon and Microsoft.

• Meta $Meta Platforms, Inc.(META)$ recently introduced its AI-powered chatbot, Meta AI, across platforms like WhatsApp, Instagram, and Facebook. Meanwhile, Microsoft $Microsoft(MSFT)$ Copilot and OpenAI's ChatGPT are gradually influencing Google’s search behavior. While we do not foresee a significant drop in Google's search market share at the moment, investors should closely monitor if Alphabet’s competitive advantage is at risk.

• We maintain a positive outlook on Alphabet due to its ongoing cost-cutting measures and AI monetization efforts.

• According to Bloomberg analyst consensus, the 12-month target price is currently at USD192.51, representing an 18.3% upside relative to Tuesday's closing price of USD162.78.