Alphabet Inc (GOOGL) NPV A

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Alphabet reported a 12% rise in first-quarter revenue to $90.2bn ($89.1bn expected).

The core advertising business, which includes Google Search and YouTube, saw revenue rise 10% to $77.3bn ($76.3bn expected). Google Cloud revenue was up by 28% to $12.3bn (as expected).

Operating income rose 20% to $30.6bn ($28.7bn expected), with margins rising from 31.6% to 33.9%.

Free cash flow was up 13% to $19.0bn and there was net cash position of $84.4bn as at the quarter end.

The company reiterated capital expenditure plans, expecting to invest around $75bn in 2025. A quarterly dividend of $0.21 was announced, up 5%.

The shares were up 4.6% in after-hours trading.

Our view

Alphabet delivered another reassuring quarter, with Google Search growth looking robust and strong margin expansion helping profits top expectations. This won’t fully dispel fears that new entrants like ChatGPT will upend its search dominance, but Alphabets own AI initiatives are taking shape.

The rise of language models presents both an opportunity and risk for the search business. Google search has long been the gatekeeper to the internet, but competition is heating up, and Alphabet faces a genuine challenge of adapting its search proposition to retain that dominance.

The strength of Google search in recent quarters is a sign that AI is already be delivering incremental improvements. AI overviews are rolling out to more users, and the numbers back up commentary that engagement is improving. Advertisers are still getting bang for their buck – which was previously a concern.

Management was a little lacking in detail when it comes to potential impact on ad demand given the tariff and trade uncertainty. Broadly speaking we think Alphabet looks relatively insulated, though a full-scale recession would be bad for everyone.

Beyond its dominant search presence, Google benefits from a wide array of high-quality businesses, with its cloud division the key growth engine. Significant infrastructure investment is being made to meet rising demand for computing power, and with demand still outpacing supply, there's strong potential for growth to reaccelerate later in the year as capacity expands.

It has the cash flows to stomach the increased investment, but over time it will lead to higher costs passing through the income statement. The expected hit to margins hasn’t come yet, with impressive efficiency improvements doing their job. We think there’s still more Alphabet can do to help support margins from a cost standpoint.

In other news, Alphabet has finally had a bid accepted for cloud security provider Wizz, helped by a sweetened offer and a potentially more deal-friendly regulatory environment. While the price is a premium to peers, Wizz’s rapid growth and strategic fit strengthen Alphabet’s cloud security suite, with its $70bn+ net cash easily covering the cost.

All in, we think the valuation has come under undue pressure and Alphabet’s range of businesses offer a good platform to drive earnings growth from here. That said, we are very mindful that the longer-term outlook is tricky to map, with increased competition in search, unknown trade war impacts, and a lot of regulatory scrutiny.

Environmental, social and governance (ESG) risk

The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.

According to Sustainalytics, Alphabet’s overall management of material ESG issues is average.

Monopoly and market dominance concerns are a key regulatory risk. It remains the subject of antitrust investigations in several countries, leading to calls from both EU and US regulators for the breakup of its online advertising business. Alphabet’s management of data handling is strong, aided by its deep pockets. But this remains a key risk to monitor in the evolving landscape of AI.

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.

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