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Alphabet - first quarter disappoints the market

Alphabet's first quarter revenues rose 26.0% to $68.0bn, ignoring the effect of exchange rates...

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Alphabet's first quarter revenues rose 26.0% to $68.0bn, ignoring the effect of exchange rates, and this was broadly in-line with analyst expectations. The performance was driven by growth in all divisions. However, YouTube performance was lower than the market expected.

Operating profit rose 22.2% to $20.1bn.

The group announced a $70bn share buyback programme.

The shares were down 2.7% in pre-market trading.

View the latest Alphabet share price and how to deal

Our view

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.

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, and has allowed it to announce a new $70bn buyback. 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 jittery. As inflation has increased, tech has fallen out of favour. That's increasing the likelihood of fluctuations, and means the market's reaction to what are sturdy results, has been muted. In fact, the group's valuation has come down a long way in recent months. We don't think the market reaction is warranted.

We think there are more positives than negatives. 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.

First Quarter Results

The core Google Services business, which includes Google Search and YouTube ads, saw revenues rise to $61.5bn from $51.2bn. Within this, Google Search revenues rose 24.3% to $39.6bn, while YouTube ads rose more slowly - up 14.4% to $6.9bn.

Total advertising revenue rose 22.3% to $54.7bn, helping Services profit rise from $19.5bn to $22.9bn.

The Cloud business saw revenue climb almost 44% to $5.8bn, while operating losses narrowed $43m to $931m.

Operating losses increased slightly in Other Bets to $1.2bn.

Traffic acquisition costs rose 23.5% to $12.0bn. Headcount rose to around 164,000 from 140,000.

Alphabet generated $15.3bn of free cash flow and net cash was $119.2bn.

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: 27th April 2022