Alphabet reported fourth-quarter sales and profits that beat expectations after the closing bell on Tuesday. There were weaknesses in the core advertising part of Google’s business, but there were also plenty of positives despite the stock price drop. Total revenue rose 13.5% year over year to $86.31 billion, beating expectations of $85.33 billion, according to estimates compiled by LSEG. Earnings per share rose 56% to $1.64, beating expectations of $1.59. GOOGL 1Y Mountain Alphabet 1 Year In our view, this is a better-than-expected report overall, and full-year expectations from Wall Street analysts should rise further in the coming days. Shares fell 5.5% in after-hours trading as sellers appeared to be focusing on weak advertising revenue. Conclusion This was an overall solid result from Alphabet. But it wasn’t enough to jump over the lofty expectations that come with a stock trading at an all-time high. Given the circumstances, the backlash seen after hours was to be expected given the lack of advertising sales, Alphabet’s main source of revenue. That said, we are encouraged by the strong recovery in cloud revenue and further growth in cloud profitability. We expect growth to continue as management works to bring the Gemini Ultra large-scale language model to market. Google is seeing high levels of engagement and demand for vertically integrated artificial intelligence solutions, resulting in “new opportunities for Google Cloud across all product areas,” the company said. Management also said in the post-earnings conference call that total subscription revenue reached $15 billion for the full year of 2023, primarily due to growth in YouTube subscriptions, helped by NFL Sunday Ticket. Additionally, cost management continues to benefit revenue as expense growth once again fell behind revenue growth, which would have been even better without his $1.2 billion charge during the quarter from optimizing office space. It would have been. The lower-than-expected operating income and profit margin would have similarly exceeded expectations but for one-time charges. The only reason you see that in the results is because Alphabet is reporting his GAAP numbers, so they don’t adjust costs this way. This is different from the majority of publicly traded companies. GAAP stands for Generally Accepted Accounting Principles and is the gold standard in finance. Capital expenditures were higher than expected, but were primarily driven by investments in technology infrastructure needed to build out cloud and AI capabilities (the largest portion being servers, followed by data centers), so this line item He is reluctant to put a burden on the team. FY2024 capital expenditures are expected to be significantly higher than his expected FY2023. But with significant capital investment, companies are beginning to see real paths to monetizing their AI investments, rather than just enhancing existing products, as Microsoft is doing with its Office suite AI assistant Copilot. We also believe that pressure on management will increase. (Club name Microsoft reported earnings Tuesday night, which also defied high expectations). While we certainly welcome improvements to existing Alphabet services, we’re also keeping an eye on new services that could bring entirely new AI-oriented revenue streams. Regarding the “permanent restructuring” of the cost base, now in its second year, CFO Ruth Porat said work continues and management is “simplifying execution and The company said it is focused on improving operational efficiency by removing layers to “increase speed.” As a result, the pace of hiring has slowed and the number of employees has decreased compared to the previous year, which is also a plus in terms of ongoing operating expenses. When a company’s stock price is trading at an all-time high, all items need to be realized. That’s not what we get from the alphabet. However, if we take a step back, we believe the company is on the right track to improve its profitability over time and realize long-term growth in subscription, AI, and cloud-driven revenue. I will maintain my rating of 2 for the time being. There’s no need to rush into it just yet. Let’s see what Metaplatform has to say about the advertising market. (Meta reported after the bell on Thursday.) That will give us an idea of where Alphabet stock will gain foothold. We raise Alphabet’s price target from $140 to $160 per share, a 4% premium to Tuesday’s closing price and more than 23.4 times expected 2024 earnings, which is an even higher upside. It is thought that it may be corrected. This is 23.4 times, which is comparable to the average price-to-earnings ratio (P/E) over the past five years. Quarterly Commentary As you can see from the earnings table above, fourth quarter operating income (and margin) of $23.7 billion was lower than expected. However, remember that the $1.2 billion in expenses related to office space optimization has not been adjusted. Had that been the case, operating profit and margin results would have been better than expected, and earnings per share (EPS) would have been even higher. Traffic acquisition costs were $13.99 billion, an increase of 8.2% year over year. This is lower than the 13.5% sales growth rate mentioned earlier. This indicates future improvement in profit margins. In terms of segment performance, advertising was a little disappointing. But expectations leading up to print were sky-high, and clearly Street was a little ahead of the curve. Google Search revenue in the fourth quarter, which was a strong contributor to overall revenue, rose 12.7% to $48.02 billion, which was less than expected. The mistakes with Google Search, YouTube Ads, and Google Network weren’t as big, but they were mistakes nonetheless. What was lost in advertising was more than made up for by Google and others, including subscription, platform, and device sales. As a result, total Google services, including advertising and Google Other, exceeded expectations for both revenue and operating profit, increasing 32% to $26.73 billion. We’re also pleased and relieved that Google Cloud’s revenue was strong, increasing 25.7% in the fourth quarter to $9.19 billion, exceeding expectations. Profitability was even better. Mistakes here were a major factor in the decline seen in the company’s last report in the third quarter, especially when compared to what Microsoft’s Azure and Amazon Web Services (AWS) delivered in the previous quarter. (Club name Amazon will report earnings after the bell on Thursday.) At the time, we weren’t too negative about Alphabet, looking only at cloud results and management that would actually be achieved in the final three months of 2023. He warned members not to become a target. The other bet, the moonshot project, this is a bit of a thorn in our side, and it could be a source of tension with investors, driving down the stock price. Sure, the division’s sales exceeded his $657 million, but those sales are insignificant in the grand scheme of things. However, it doesn’t matter that the quarterly loss was a much larger than expected $3.03 billion. When a company is as successful as Alphabet, we tend to give other bets a pass because they need to invest in their future. Part of the game is taking risks on projects that may ultimately fail in order to find the next billion-dollar revenue stream. However, in the next quarter, we will be careful to avoid a repeat of the magnitude of the fourth quarter’s loss. Operating cash flow in the company-wide section of the earnings statement was lower than expected, dropping nearly 20% to $18.92 billion in the fourth quarter. But some of the weakness here was foreshadowed on last quarter’s conference call, as management informed investors that it had injected $10.5 billion in additional capital shortly after the end of the third quarter. It is unclear how much is factored into the fourth quarter estimates. Capital Returns However, the cash flow failure did not prevent management from returning significant cash to shareholders through share buybacks during the quarter. Alphabet returned $16.2 billion to investors in the fourth quarter through share buybacks, more than 85% of its operating cash flow, partially offset by $5.66 billion in stock-based compensation. The company ended the quarter with $111 billion in cash, cash equivalents, and marketable securities on its balance sheet. (Jim Cramer’s charitable trusts are long GOOGL, MSFT, META, AMZN. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, Jim trades Receive trade alerts before you make them. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in a charitable trust’s portfolio. If Jim talks about a stock on his CNBC TV, he will wait 72 hours before executing the trade after issuing a trade alert. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. 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An exterior view of Google’s new headquarters at 550 Washington Street in Hudson Square, New York City, January 9, 2024.
Michael M. Santiago | Getty Images
alphabet After Tuesday’s closing bell, the company delivered better-than-expected fourth-quarter sales and profits. There were weaknesses in the core advertising part of Google’s business, but there were also plenty of positives despite the stock price drop.
