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Alphabet - first quarter beats expectations

Alphabet's first quarter results were better than expected.

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Alphabet's first quarter results were better than expected. Revenue rose 6% to $69.8bn, ignoring the effect of exchange rates. On a reported basis, advertising revenue fell around $100m to $54.5bn. Within this, the biggest division, Google Search & Other revenue increased.

Traffic acquisition costs (TAC) were $11.7bn, down from $12.0bn.

Operating profit was around $2.5bn lower at $17.4bn, reflecting higher research and development, sales and marketing and general costs. Margins dipped five percentage points to 25%. However, within operating profit, the group's previously heavily loss-making division, Google Cloud, posted profit for the first time. It generated operating profit of $191m.

Free cashflow generated was $17.2bn, while Alphabet had net cash of $101.4bn as at the end of the period.

A $70bn buyback programme was also announced.

The shares rose 1.7% in after-hours trading.

View the latest Alphabet share price and how to deal

Our view

There's no other way to describe Alphabet's first quarter other than a triumph. Times are tough for companies that rely on advertising spending, which is why ad growth is ultimately slower for the Google owner. But crucially, things are better-than-expected, ending a run of disappointing results.

Alphabet is one of the better placed names in the industry. The scale and power of Google's reach is formidable, and that won't be undone by a downturn. Alphabet's essential status for marketers makes it more able to stomach inflation, as its customer base is about as sticky as they come.

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.

The biggest development of late is the fact Cloud has become profitable for the first time. It's not exactly shooting the lights out on this metric, but it's come on leaps and bounds from the hundreds of millions in losses just last year. The rapid rise in AI interest is acting as a rocket ship for Google Cloud's revenue, which shouldn't be knocked. 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.

Our main concern relates to the competition authorities. 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.

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.

Overall, Alphabet carries more regulatory risk than some of its peers, so it's important to keep that in mind. We think there's 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.

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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Article history
Published: 26th April 2023