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Alphabet - revenue behind expectations

Second quarter revenue rose 16% to $69.7bn.

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Alphabet's second quarter revenue rose 16% to $69.7bn, ignoring the effect of exchange rates, which was slightly behind analyst expectations . Advertising revenue rose to $56.3bn from $50.4bn, reflecting growth across Google Search, YouTube and Google Network.

Operating margins fell three percentage points to 28%, but the increased revenue meant operating profits came in $92m higher at $19.5bn, despite widening losses across Other Bets and Google Cloud.

The shares rose 3.8% in pre-market trading.

View the latest Alphabet share price and how to deal

Our view

The scale of Alphabet's 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.

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. Google's younger operations here mean the division is still heavily loss making, but the cloud is building sufficient steam that profits should be able to break through the mist within a reasonable timeframe. 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.

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.

We're also aware that the wider environment is jittery. As inflation has increased, tech has fallen out of favour with investors. That's increasing the likelihood of share price fluctuations and means Alphabet must peddle hard simply to tread water as far as its valuation is concerned.

We should also add that Alphabet's essential status for marketers makes it more able to stomach inflation, as its customer base is about as sticky as they come in the sector. However, it's not completely immune to residual issues from a tough economic backdrop. Ad growth has slowed from the headier days of last year when Alphabet benefited from post-pandemic re-openings and a surge in consumer spending. Double digit growth from this new base most certainly shouldn't be dismissed, but the fact Alphabet's momentum has come off the boil should be a warning for advertising revenue everywhere.

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 ups and downs, threats and opportunities of this tech giant, but the fact of the matter is, Alphabet has well over $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.

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

Within Alphabet's core advertising business, Search did particularly well. At YouTube, YouTube shorts had over 1.5bn signed-in viewers every month, and with more than 30bn daily views. Google Search revenue increased 13.5% to $40.7bn, and YouTube ads increased $338m to $7.3bn. Google Network went from $7.6bn to $8.3bn. Total Google Services operating profits increased 1.9% to $22.8bn.

Google Cloud saw revenue rise 35.6%, while divisional operating losses widened to $858m from $591m as the group continues to invest in infrastructure. Performance was boosted by new customers, including Target in the US as well as public-sector contracts.

Other Bets revenue was broadly flat at $193m. New tests were carried out for the group's self-driving car concept, Waymo. Operating losses were $1.7bn compared to $1.4bn.

Traffic acquisition costs increased 11.8%, while employee headcount jumped around 30,000 to 174,014.

Alphabet generated free cash flow of $12.6bn, while net cash stood at $110.3bn.

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 July 2022