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Alphabet Inc (GOOGL) NPV A

Sell:$1,480.80 Buy:$1,481.46 Change: $16.28 (1.09%)
Market closed |  Prices as at close on 11 August 2020 | Switch to live prices |
Change: $16.28 (1.09%)
Market closed |  Prices as at close on 11 August 2020 | Switch to live prices |
Change: $16.28 (1.09%)
Market closed |  Prices as at close on 11 August 2020 | Switch to live prices |
The selling price currently displayed is higher than the buying price. This can occur temporarily for a variety of reasons; shortly before the market opens, after the market closes or because of extraordinary price volatility during the trading day.

HL comment (4 February 2020)

Alphabet's total fourth quarter revenues came in slightly behind estimates at $46.1bn, despite growing 17.3% year-on-year. That reflects slower than expected growth in the non-advertising Google business - which includes Cloud, Hardware and Play.

Operating profits of $9.3bn during the quarter were also slightly behind expectations, with quarterly operating margins deteriorating year-on-year. Losses from the 'other bets' portfolio mounted to over $2bn.

The shares fell 2.7% in premarket trading.

Our view

Alphabet can essentially be split in two. The cash generative core Google business and cash hungry newer initiatives.

For Google it's all about volumes. The more people use Google, the better. Same goes for YouTube, Maps and the Play Store. As we spend more time online, advertising through these platforms becomes ever more attractive to advertisers.

The group has to incentivise others to offer its products as the go-to app on their devices, and some revenue is paid out to web partners. But in the great scheme of things not much cash is tied up in the operation. As a result, the core business is highly profitable.

That's given Alphabet the firepower to invest in side-projects like Waymo self-driving cars and Verily life sciences. These have the potential to bring significant profits, but are higher risk and unlikely to move the dial yet in any case.

A notable exception is Alphabet's investment in cloud networks, which provide on demand computing power and services to others. Rapid growth means the division is making around $10bn a year in revenue. However, significant investment here means capital expenditure has risen sharply. Fortunately the core business is more than able to meet those demands and still generate tens of billions in free cash flow every year.

Alphabet's cash on hand already stretches well past $100bn. It doesn't pay a dividend, and while the group has sanctioned a significant share buyback, it's still been able to step up spending on those Other Bets or pursue acquisitions.

The main worry is around regulation. The group already racked up billions in fines, and with the Department of Justice assessing the big tech giants' competitive practices, there's scope for the landscape to change.

Still, there's plenty of room for growth in the core business. Alphabet says nearly half of US ad budgets are spent offline and only around 10% of shopping is digital. To us the group looks well placed to benefit as these trends develop and that underpins our confidence it can grow profits in the years ahead. Alphabet currently trades on a PE ratio of 27, above the long run average but behind fellow cloud giants Microsoft and Amazon.

Register for updates on Alphabet

Fourth Quarter Results

Fourth quarter Google advertising revenues rose 16.7% to $37.9bn. This includes an 18.5% increase in revenue from Google owned 'properties' like, Gmail, Maps and YouTube, and a 7.8% increase in Network member properties where Alphabet provides adverts for third party websites' advertising space.

Google Cloud revenues rose 53% to $2.6bn while Google Other (which includes the Google Play store and hardware sales) saw revenues rise 10.3% to $5.3bn.

Revenues from 'other bets' rose 11.7% to $172m, although a significant increase in costs led to a decline in overall profits.

Total costs of $36.8bn were 18.5% higher than last year. Within that, Traffic Acquisition Costs (TAC), which reflects what Google pays partners to be able to place ads on their sites, or for making Google a default search provider, rose 14.3%, to $8.5bn.

TAC as a proportion of total advertising revenue decreased slightly year-on-year. However, a rise in Research & Development, and 20.4% increase in headcount, the extra costs meant operating margins fell to 20% (2018: 21%).

The group generated free cash of $8.4bn during the quarter, returning $6.1bn to shareholders through share buybacks.

The group finished the year with net cash of $115.1bn.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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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