After the U.S. stock market on Thursday, April 25, Alphabet, the global digital advertising and search giant and Google's parent company, which has also made a big push into AI, released its financial report for the first quarter of 2024.
Alphabet's stock price rose more than 15% to an all-time high after hours as both advertising and cloud revenue accelerated, exceeded expectations across the board, and paid quarterly dividends for the first time in history, and if it remained until Friday's open, it would send its market value soaring by about $300 billion.
Alphabet Class A shares closed down about 2% on Thursday, halting a three-day winning streak, but this year it has risen more than 11%, significantly outperforming the broader market, and has risen 50% in the past 12 months.
Wall Street's consensus rating on Alphabet is a "Strong Buy" due to the continued strength of the core search, YouTube ads and cloud sectors, with 30 analysts recommending "Buy", 7 rating "Hold" and none recommending "Sell", with an average price target of $167.51, representing a potential upside of 9%.
Google's Q1 revenue growth accelerated to its fastest in two years, profits surged by 60% year-on-year, and it bet on $12 billion in capital expenditures on AI
According to the financial report, Google's parent company's total revenue in the first quarter was US$80.54 billion, a year-on-year increase of 15%, the fastest growth rate since the beginning of 2022, and higher than the market expectation of US$79.04 billion. Adjusted earnings per share of $1.89 beat expectations of $1.53 and surged 61.5% from $1.17 a year earlier. Net profit jumped 57% year-on-year to $23.66 billion, higher than expectations of $18.95 billion.
Compared with the revenue of $86.31 billion, EPS earnings per share of $1.64, and net profit of $20.69 billion in the fourth quarter of last year, Google's parent company's first-quarter revenue declined quarter-on-quarter, which was in line with market expectations, but profits were unexpectedly boosted, benefiting from the benefits brought by AI.
Overall, Google's year-over-year revenue metrics are accelerating, with total revenue returning to double-digit year-over-year growth for the first time in more than a year in the third quarter of last year, after four consecutive quarters of growth falling back to single-digit percentages, largely due to weaker spending by advertisers due to surging inflation and aggressive interest rate hikes by the Federal Reserve.
Wall Street generally believes that the growing demand for AI generated by integrating generative AI into products is likely to continue to boost its cloud business revenue in the coming quarters. At the same time, ad revenue led by search and YouTube is improving in line with industry trends.
Google's traffic acquisition cost (TAC) paid to partners for the quarter was $12.95 billion, beating market expectations of $12.74 billion, a metric that had an impact on profits. However, operating margin widened to 32% from 25% in the year-ago quarter, higher than expectations of 28.6%. In terms of high-profile AI investments, Google's capital expenditures for the quarter were $12 billion, $1.7 billion more than expected.
According to the company, researchers have made rapid progress on the large language model Gemini, and capital expenditure has increased, reflecting investment in infrastructure. Google is starting to deploy AI overviews to major search pages.
CEO Pichai said in a statement that Alphabet's leadership in AI research and infrastructure, as well as its global product footprint, positions the company well for the next wave of AI innovation.
Its financial report also said:
"As announced on April 18, we are integrating teams from Google Research and Google DeepMind focused on building AI models to further accelerate progress in the AI space. The AI model development team of the Google Services division, previously part of Google Research, will be included in the Alphabet-level campaign as part of Google DeepMind, which is expected to begin in the second quarter of 2024. ”
Cloud business growth has re-accelerated to a high of around 28% since the beginning of last year, and its operating profit has quadrupled
In terms of business, the cloud business, which is most concerned by the market and is regarded as Google's next growth engine, saw its first-quarter revenue increase 28.4% year-on-year to $9.57 billion, higher than analysts' expectations of $9.37 billion. In the fourth quarter of last year, it increased by 25.7% to $9.19 billion, doubling the growth rate of overall revenue for several consecutive quarters.
This also represents a re-acceleration of the year-on-year growth rate of Google Cloud's revenue, which is pleasing to Wall Street and effectively drives the stock price to soar after hours. Cloud revenue grew 37.6% year-over-year in the third quarter of 2022, slowing to 32%, 28%, 28% and 22% in the fourth quarter of that year and the first three quarters of 2023, respectively, and the re-acceleration from the fourth quarter of last year has helped ease analysts' concerns about stagnant growth.
At the same time, the operating profit of Google's cloud business more than quadrupled to $900 million from $190 million in the same period last year, continuing to be on track to turn a profit, indicating that the multi-year investment is finally generating a strong return.
Previously, the Google Cloud business was a key investment area for the company, and with the advent of generative AI, the business became even more important as more and more companies are turning to the public cloud to run heavy workloads.
Google, which ranks third in the cloud computing market share, is still struggling to catch up with rivals Amazon and Microsoft. Google Cloud, which includes infrastructure and data analytics platform (GCP, Google Cloud Platform) for enterprise customers, as well as productivity and collaboration tools (Google Workspace), accounts for nearly 12% of total revenue, still far behind Microsoft, the leader in the cloud space.
Advertising revenue improved steadily and exceeded expectations across the board, and the scale of innovative business cash burning narrowed year-on-year
The core advertising business is also a key revenue driver for Google, which Wall Street is closely watching, with ad revenue in the first quarter rising 13% year-on-year to $61.66 billion, higher than the expected $60.18 billion, representing accelerated growth from 2023.
Among them, advertising revenue from the YouTube video platform rose nearly 21% year-on-year to $8.09 billion, higher than the forecast of $7.72 billion. Google's search and other advertising revenue increased by more than 14% year-on-year to $46.156 billion.
This all marks a solid improvement in its advertising revenue, which has been improving since the fourth quarter of 2022 when it reported negative growth due to a weak economy and increased competition from TikTok, Google's core advertising business, which had weakened due to a weak economy and increased competition from TikTok.
Previous analysis has shown that generative AI can provide more creative and comprehensive answers to simple text queries, which could have a significant impact on Google's core search and advertising business if people change the way they find information online as a result.
Other Bets used to be Google's technology innovation arm that positioned forward-looking product development and venture capital, including self-driving startup Waymo, smart healthcare Verily, and venture capital funds Google Capital and Google Venture.
The business's revenue rose nearly 72% year-over-year to $495 million in the first quarter, above expectations of $372 million, and the operating loss was $1.02 billion, narrowing from a loss of more than $1.2 billion a year ago and better than the consensus of a loss of $1.1 billion.
In addition, Google Services' quarterly revenue increased 13.6% year-on-year to $70.4 billion, beating market expectations of $69 billion, and operating profit increased more than 28% year-on-year to nearly $27.9 billion, significantly higher than the consensus of $24.3 billion.
For the first time in its history, Alphabet paid a quarterly dividend and repurchased up to $70 billion in additional shares
Another driver that drove Google's stock price to new highs after hours was Google's decision to pay its first quarterly dividend.
Alphabet said its board of directors had approved the payment of a cash dividend of 20 cents per share on June 17 to shareholders of record as of June 10 and "intends to continue to pay quarterly cash dividends going forward." The company also authorized an additional $70 billion in share repurchases.
At the end of the first quarter, Alphabet's cash, equivalents and marketable securities were $108 billion, down slightly from $110.9 billion in the same period last year. The number of employees worldwide decreased by 5.1% or 9,800 year-on-year to approximately 181,000.
Some analysts said that perhaps the number of employees is the most important number in this financial report, "Google (following Meta) has also started a year of efficiency, with the number of employees falling by nearly 10,000 and the operating profit margin jumping from 25% to 32%. ”
What do you focus on most?
The AI outlook remains a key focus for Alphabet this earnings season, particularly whether it can drive accelerated growth in Google Cloud revenue. Analysts will focus on the latest developments in AI initiatives and Gemini AI models.
The CFRA forecasts that Google Cloud's revenue growth will remain at least 25% throughout 2024, helping to alleviate concerns about stagnant growth. Bank of America said strong search revenue would help boost the deterioration in sentiment toward AI.
There are also analysts who focus on Google's profit margins "because the company has failed to cut costs as aggressively as other big tech giants." Google has also launched Axion, a self-developed AI chip tailored for data centers, which will increase AI development spending.
What do you think of Wall Street?
The Paris 2024 Olympics and the U.S. presidential election will improve the advertising environment and are widely seen as key forces supporting Google's earnings reports.
Goldman Sachs said industry trends point to strong revenue from search this year and a recovery in YouTube revenue. Jefferies continues to be bullish on Google in the second half of the year "as we see improved momentum in the core advertising business and AI-fueled viewability in 2025." According to the CFRA, cloud, search, YouTube, and Google's other businesses "have incremental opportunities related to AI monetization."
However, the intensification of long-term competition in the AI space, and even the risk of disrupting Google's core search business, as well as the tightening of regulations in Europe and the United States, also pose certain challenges. According to Bernstein, any misstep by Alphabet could be a "wake-up call for AI".
Monness Crespi Hardt, an investment bank with a "hold" rating on the stock, said it believes Alphabet is in a strong position to capitalize on digital advertising trends, build a lasting cloud business, and innovate with artificial intelligence:
"However, the regulatory environment is not optimistic, competitive risks are intensifying, Google's internal execution is uneven, and the macro economy may be mired in a quagmire, and perhaps the darkest days lie ahead. ”
Jefferies attributed some of the uncertainty to speculation about a new share buyback mandate and a new CFO to succeed Ruth Porat, who said last year that he would step down as CFO and become chief investment officer and president.
Last week, Google announced a restructuring of its finance department to devote more resources to AI and integrate its AI team under Google's DeepMind umbrella, predicting that "the tech industry is in the midst of a huge platform shift brought about by Al." ”
KeyBanc expects continued layoffs in the second quarter of this year as Google focuses more on product velocity and division restructuring in the AI era, but this indicates a further rise in operating profit:
"As Alphabet continues to invest in AI infrastructure, capital expenditures could reach $42 billion this year and further increase to $46 billion next year. ”
According to some analysts, Alphabet suffered some AI setbacks at the start of the year, and problems with the image generator caused the company to withdraw the tool from the market. Google has also laid off dozens of employees who have participated in a series of protests over labor conditions and the provision of cloud computing and AI services to the Israeli government and military:
In addition, the U.S. Department of Justice's lawsuit against Google's search distribution business, as well as another lawsuit against its online advertising business, are also in the spotlight, not to mention European legislation aimed at creating a more competitive digital environment, including the Digital Markets Act and the upcoming EU Artificial Intelligence Act. ”
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