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Alphabet - better than expected as cloud profits jump

Alphabet recorded revenue of $74.6bn in the second quarter, which was better than expected and reflected a 7% increase on the previous year.

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Alphabet recorded revenue of $74.6bn in the second quarter, which was better than expected and reflected a 7% increase on the previous year. There was a 3.3% increase in advertising revenue to $58.1bn, with YouTube ads of $7.7bn better than analysts hoped for.

Operating profit rose 12.3% to $21.8bn, with the core Google Services division rising by around $2.0bn. A large driver of growth was Google Cloud, which saw a swing from losses of $590m to profit of $395m. Margins were also underpinned by total costs and expenses rising more slowly than revenue, up 5.0%.

Alphabet generated free cash flow of $21.8bn and had net cash of $104.6bn as at the end of the period.

CFO Ruth Porat will assume the newly created role of President and Chief Investment Officer of Alphabet and Google, from September 1, 2023. A search for a successor is underway.

Alphabet shares rose 5.7% in after-hours trading.

View the latest Alphabet share price and how to deal

Our view

Alphabet is first and foremost an advertising business. Marketers are eager to throw their cash at Google to help promote their products or optimise their online presence, among a host of other tools.

Advertising growth isn't exactly shooting the lights out, but it's held up better than expected. Marketing budgets tend to get cut when the economy's sluggish. But Alphabet's customers are about as sticky as they come. This highly powerful advertising offering is where a lot of the AI excitement comes in. The technology could help generate more personalised and powerful ads, ultimately attracting and retaining more marketing dollars. For now, this is still in the testing phase. There's a risk that the boom in AI could see come search market share dissolve, but for now we're optimistic Alphabet will retain its edge.

The considerable year-to-date rally in Alphabet's valuation is also being driven by excitement around Google Cloud. This has only recently hit profitability - an important milestone. We think there's room for Google Cloud to grow from here, especially as companies look to optimise their processes and protect margins. But we're mindful this landscape will become very competitive and there's no guarantee just yet that Alphabet will be the one with the winner's rosette at the end.

We're also supportive of plans to downsize the workforce. While advertising revenues come off the boil, it's important to keep costs in check. We can't rule out further ups and downs in the share price while global economies navigate their landing points, because this will have an impact on Alphabet's bottom line.

Core advertising profitability has given Alphabet the firepower to invest in various side-projects. 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.

Competition authorities remain something to be aware of. Alphabet isn't a stranger to substantial fines, and we can't rule out the risk of further action from authorities in the future if the group's dominance strays too far.

Competition is also heating up, with the rise of short-form videos from the likes of TikTok or Instagram reels vying for Alphabet's important YouTube viewers. At this point there aren't any flashing red indicators, but as the medium develops it's a trend to watch closely.

It's easy to debate the threats and opportunities of this tech giant, but the fact of the matter is, Alphabet has around $100bn in net cash languishing on the balance sheet. That means it's more than able to stomach disruption and return some cash to shareholders too via a hefty buyback programme.

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.

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: 26th July 2023