Google Beats Q1 Earnings: I'll Stay Long

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Google Beats Q1 Earnings: I'll Stay Long

Seekingalpha2023-04-26

SummaryAlphabet Inc./Google just released its first quarter earnings.The release easily beat analyst estimates on revenue as well as on earnings per share.Heading into the first quarter, I was ...

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PeanutButterMonster
·2023-04-26
Don't underestimate Google
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Andrewinho
·2023-04-26
👍👍👍
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(NASDAQ:GOOG, NASDAQ:GOOGL), hereafter referred to as “Google,” just released its first quarter earnings. The release showed $1.17 in first quarter earnings per share, and $69.7 billion in revenue. The metrics beat analysts’ estimates on both the top and bottom lines. Far and away the most impressive thing in the release was Google Cloud’s swing to positive EBIT profits, a first for that segment.Overall, Google’s first quarter release was about in line with what I expected. I knew going into the release that Google’s layoffs would eventually boost earnings, but I also knew that the company had $1.9B to $2.3B in severance pay to hand out. Given this fact, it was not surprising that Google’s earnings declined once more. The severance pay was a hurdle that had to be cleared before earnings could start climbing again.Given that most of Google’s severance pay has been paid out, it looks like the company has an opportunity to start growing earnings again later this year. With $69.7 billion in first quarter revenue and a major reduction in headcount, management has a good foundation to build from.Expectations were pretty dim heading into Google’s first quarter release. Early in the first quarter, Microsoft Corporation made waves by launching its own AI-powered search in Bing. Bing initially wowed reviewers with its ability to search the internet for new information, making it better for news-related queries than ChatGPT was. Later, though, some of the luster came off the chatbot when it was found to have insulted users and delivered inaccurate information. Google’s Chatbot, Bard, had issues of its own, but its launch correlated closely with a rise in Google’s stock price.Now that Google’s first quarter earnings are out, we have some idea of how all of these projects are going. Tentatively, the picture looks pretty good. In this article, I will explain why I’m moderately bullish on Google stock following its strong first quarter earnings release.Earnings RecapIn the first quarter, Google delivered:$69.7 billion in revenue, up 3%, a beat.$15.05 billion in net income, down 8.4%, a beat.$1.17 in diluted EPS, down 4.8%, a beat.$23.5 billion in cash from operations, down 6.3%.$17.22 billion in free cash flow (“FCF”), or $1.34 in FCF per share.$40.83 billion in Google search revenue, up 1.8%$5.86 billion in YouTube ad revenue, down 2.3%.$7.5 billion in cloud revenue, up 29.6%.$191 million in cloud EBIT profits, up from a loss.Overall, it was a decent showing. With $15.05 billion in earnings and $69.7 billion in revenue, Google had a 21.5% profit margin, which indicates healthy profitability. The growth was not so impressive, but some slowdown was to be expected after the heady growth Google enjoyed in 2021.One highlight of the release was Google Cloud’s EBIT profitability. That was a first for the segment, and with the growth still strong, the contribution to the bottom line could be substantial.ValuationPrior to today’s release, Google's stock traded at the following multiples (according to Seeking Alpha Quant):P/E: 23.Price/sales: 4.87.Price/book: 5.3.Price/operating cash flow: 14.66.With Google’s first quarter release out, a few of these multiples have changed. For example, the $1.17 in earnings per share changes the P/E ratio to 24.4, which is slightly worse than it was before. Book value and revenue are both largely unchanged from the prior quarter. With the NASDAQ-100 today trading at 23.72 times earnings, it looks like Google is about fairly valued on a sector-relative basis.We can also look at Alphabet’s valuation from the perspective of discounted cash flows. Trailing 12 month free cash flow per share is currently $4.77, with the $1.34 just added this quarter plus $3.43 from the previous three quarters. Discounted at the 10 year Treasury yield (3.55%), that’s worth $134. If you discount it with a 3% risk premium, it’s worth $86.7. Both of these calculations assume 0% growth into perpetuity, if you take the average of them, it appears to point to Google being slightly undervalued ($110 fair value estimate). So, Google scores relatively well on the value factor compared to the rest of big tech.Looking AheadIn addition to releasing its earnings, Google also gave some clues as to what’s in store in the future. Among other things, it has indicated that it will:Integrate the Bard AI meaningfully into Google search, as Microsoft has done with Bing. The overall effect of this could be mixed. It may help Google shore up its competitive position, as ChatBots are thought to be a threat to search. However, it could also cause a $6 billion hit to EBIT according to Morgan Stanley (MS), as chatbots are more expensive to run than Google search currently is.Promote YouTube shorts. Short content has been a big phenomenon in video sharing sites lately, driven by the rapid rise of TikTok. Google is trying to get YouTube engagement up, so it’s likely to keep promoting shorts to get some of the user time that’s being spent on short form video.Continue growing the cloud segment. As Google’s first quarter release showed, the Cloud is by far the biggest growth driver for Google, growing at 29.6% year over year. Google isn’t going to want to let that growth decelerate, as there’s not much growth elsewhere in the business. So, continued investment in the cloud is likely.Overall, Google has some promising investments available to it right now. YouTube is the weak link at the moment, with negative revenue growth, but there has been real strength in the cloud, and Google Search market share is holding up well despite the progress Microsoft has made with Bing. Additionally, at some point in the next month, Google will begin to “lap” prior quarters in which the 2022 earnings decline had already begun, making them easier to grow from. On the whole, there are many reasons to be optimistic about the quarters ahead.Risks and ChallengesDespite having an overall positive view on Google stock, I think there are many risks and challenges that investors need to be aware of. Some of the most important include:Currency impacts. Currency impacts have been holding back Google’s revenue for many quarters now. The U.S. dollar is relatively strong compared to other global currencies at the moment–in particular the euro. With the U.S. dollar making gains, Google’s EU-sourced revenue is becoming less valuable after currency conversion, and that’s partially what’s causing Google’s revenue growth this year to be so underwhelming. If the U.S. dollar keeps making gains, then the reported revenue growth will be even slower, increasing the odds of Google disappointing investors. On the other hand, if the trend in the dollar reverses, it could be a tailwind for Google.Legal risk. Google is facing multiple different anti-trust investigations right now. Presently, it’s being sued by the U.S. Justice Department for abusing its market position. There are similar actions underway in Europe. These anti-trust lawsuits, when they are successful, can cost tech companies billions of dollars. For example, Google recently got sued for $4.12 billion in Europe, attempted to have the ruling turned over on appeal, but lost at the appellate court. It appears quite likely that Google will be forced to pay out that $4.12 billion.Diminishing market share. Earlier I mentioned that Google’s market share in Search was still strong. It is: it had 93.17% of the market worldwide. The market share breakdown currently looks good for Google, the problem is that the trends are not heading in its direction: Bing is ever so slightly making gains, having picked up some users with the launch of its AI Chatbot this year. This is not to say that Bing will continue making gains at the expense of Google; if the mass rollout of Bard is a success, then that probably won’t happen. However, Morgan Stanley estimates that including Bard in all Google searches will cost it $6 billion a year in EBIT, so GOOG faces a “stuck between a rock and a hard place” situation here.The Bottom LineThe bottom line about Google’s most recent earnings release is that it confirmed what investors have long believed about the company: that it is a high-moat enterprise whose stock is relatively inexpensive by the standards of its peer group. Google’s revenue growth is still positive, and its most recent earnings, while declining, are nevertheless declining by much less than they were previously. Still, Google stock remains cheaper than most of the other big tech giants. I’m content to keep holding Google stock for the time being.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9947945462,"gmtCreate":1682511138456,"gmtModify":1682511143624,"author":{"id":"4107067226858820","authorId":"4107067226858820","name":"PeanutButterMonster","avatar":"https://community-static.tradeup.com/news/b755699bba0c75bab0fb8daf50e5b7f1","vip":1,"crmLevel":5,"crmLevelSwitch":0,"authorIdStr":"4107067226858820","idStr":"4107067226858820"},"htmlText":"Don't underestimate Google","listText":"Don't underestimate Google","text":"Don't underestimate Google","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9947945462","repostId":1164465293,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9947945156,"gmtCreate":1682510855875,"gmtModify":1682510859599,"author":{"id":"3581563418944392","authorId":"3581563418944392","name":"Andrewinho","avatar":"https://static.tigerbbs.com/3127e2bc40ab23064a5187a00a63e19b","vip":1,"crmLevel":2,"crmLevelSwitch":0,"authorIdStr":"3581563418944392","idStr":"3581563418944392"},"htmlText":"👍👍👍","listText":"👍👍👍","text":"👍👍👍","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9947945156","repostId":1164465293,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":18,"commentSize":2,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}