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Alphabet - beats expectations, announces stock split

Alphabet's fourth quarter revenues rose 32% to $75.3bn, better than expectations...

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

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.

The shares rose 9.2% in after-hours trading.

View the latest Alphabet share price and how to deal

Our view

The important thing to remember with Alphabet's stock split is the overall value of the company won't change. The pie stays the same size, but there are more slices. The more interesting side in this case is that the split reduces the value of each individual share, making Alphabet more accessible to smaller investors.

This doesn't change the investment case, so it's important to look at the big picture.

Google owner Alphabet is first and foremost an advertising business - the newspaper of the modern age. 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 in the final quarter.

Nearly half of US ad budgets were spent offline pre-Covid, and only 10% of shopping was digital. There's likely to have been a lasting change in both over the last year - which can only be good news for Alphabet.

Over the years, core advertising profitability has given Alphabet the firepower to invest in various side-projects. Most notable is Google Cloud, where revenues are growing incredibly quickly, and with losses declining there's even an outside chance of profits soon. Other Bets, that range from self-driving cars to life sciences barely generate any revenues let alone profit. One of these moon-shots could eventually be as world changing as Google itself, but that's some way off.

Fortunately, cash on hand stretches well past $100bn. Some of that finds itself being funnelled back to shareholders. But despite this and extra investment requirements, Alphabet still generates huge quantities of free cash.

Our main concern where Alphabet is concerned doesn't really have anything to do with the company itself. Alphabet has already racked up billions in fines, and its increasing dominance puts the group at the forefront of regulators' minds. Regulators who have an increasing willingness to act.

We're also aware that the wider environment is a little jittery. As inflation has increased, tech has fallen out of favour. Alphabet isn't being too affected by this at present, but should further interest rate announcements appear, we can't rule out some short-term fluctuations.

We still think there are more positives than negatives in Alphabet. Alphabet carries a higher degree of regulatory risk than some of its peers, so it's important to keep that in mind. However despite the regulatory and wider macro threats there is potential for further growth over the long-term. Investors should however be aware there's likely some volatility waiting in the wings.

Alphabet key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Second Quarter Results

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, up from $17.2bn and net cash of $124.8bn.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 2nd February 2022