To The Moon

‌‌$Alphabet(GOOG)$‌Q2 earnings were mixed. With the company fresh off a stock split, investors got a front-row seat to the internet giant's challenges.

This has been a busy year for Alphabet (GOOG -1.26%) (GOOGL -1.39%). The company has acquired two companies in the cybersecurity space and most recently completed a stock split. Alphabet recently reported second-quarter 2022 earnings and the results were mixed. Though the search and cloud segments were big winners, some investors may be worrying about how the internet giant can sidestep its competition as well as combat macroeconomic factors such as lingering inflation. Let's dig into the Q2 earnings and analyze if Alphabet appears to be a good buy, or if investors should look elsewhere.

Is the slowdown in revenue a cause for concern?

For the second quarter, which ended on June 30, Alphabet generated $69.7 billion in total revenue. This was an increase of 13% year over year. By comparison, Alphabet grew revenue by a staggering 62% year over year during the same period in 2021. Given the slowdown in top-line growth, investors may be quick to sell and search for new investment opportunities. However, the most prudent thing investors can do is look at where Alphabet may be experiencing levels of stagnation or even declining growth, and which areas are performing well. The table below illustrates Alphabet's revenue streams during Q2 2022, and percentage changes year over year.

The search and cloud segments increased 14% and 36% respectively. Advertising from YouTube only increased only 5%. During Q2 2021, YouTube advertising revenue increased by 84%. The massive slowdown in growth is, in part, driven by competing applications such as TikTok. It is important to note that Alphabet has rolled out its own derivative of TikTok, YouTube Shorts. However, management noted during the earnings call that YouTube Shorts is in early development and not yet fully monetized. Additionally, investors learned that vendors have been slashing advertising budgets across different industries due to uncertainty around the broader economic environment, thereby posing a systemic risk to Alphabet's ad revenue stream.

Given that advertising budgets and lingering inflation do not have a clear path to subside, investors may want to focus on other areas of Alphabet, namely cloud computing.

Are the acquisitions paying off?

Earlier this year Alphabet acquired two cybersecurity companies, Mandiant and Siemplify The strategic rationale behind these transactions was that Alphabet would integrate the new products and services into its Google Cloud Platform. This was a direct effort to combat cloud behemoth Amazon, as well as cloud and cybersecurity competitor Microsoft. 

For the quarter that ended June 30, Alphabet reported $6.3 billion in cloud revenue, up 36% year over year. To put this into context, during Q2 2021 Google Cloud was operating at roughly $18.5 billion in annual run-rate revenue. Only one year later, Google Cloud is now a $25.1 billion annual run-rate-revenue business. While this revenue growth is impressive, it certainly has come at a cost. Google Cloud's operating loss was $858 million for Q2 2022, compared to a loss of $591 million during Q2 2021. Despite robust top-line growth, Alphabet has yet to turn a profit on its cloud platform. By comparison, Amazon's cloud business operates at a profit, with margins expanding from 28% in Q2 2021 to 29% in Q2 2022.

Keep an eye on valuation

From its stock split in early July, Alphabet stock is up roughly 5%. With cash on hand of $17.9 billion and free cash flow of $12.6 billion, it's difficult to make a case that Alphabet is in financial trouble. However, Alphabet is at a critical juncture where it is seeing competition from much smaller players, as well as big tech peers.

Perhaps investors should be looking at Alphabet as a growth company. Given its cloud business has a lot of room to grow, and that economic pain points like inflation will not last forever, it could be argued that Alphabet will generate meaningful growth in the years ahead. While the stock has been somewhat muted since the split, now may be a decent time to dollar-cost average or initiate a long-term position while keeping a keen eye on upcoming earnings reports. While Alphabet is not yet out of the woods, there are several reasons to believe that now is a good time to buy the stock.