2024-07-24
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After the U.S. stock market closed on Tuesday, July 23, Alphabet, the global digital advertising and search giant and Google's parent company, which has made a big push into AI, released its second quarter 2024 financial report.
The company's revenue and EPS earnings exceeded expectations in the quarter, with only advertising revenue from YouTube slightly falling short of expectations. The highly anticipated growth engine cloud business achieved its first quarterly revenue of over $10 billion and quarterly operating profit of over $1 billion. The stock price fluctuated greatly after the market, first rising 2% and then falling 1%, then turning to rise again and rising 3% at one point, but ultimately still falling by more than 1.6%.
Before the earnings report was released, Google A rose 1% on Tuesday and closed slightly higher. So far this year, it has risen by more than 30%, exceeding the gains of its competitors Microsoft and Amazon, and significantly outperforming the S&P 500 index, which rose by more than 16% and the Nasdaq, which rose by 20% during the same period. Since the positive first quarter report, Google A has risen by more than 16%. In June, the first batch ofDividendsDividends20 cents per share and implement $70 billionStock Buybacks。
As Alphabet continues to be optimistic about the continued strength of its AI-powered core search business, YouTube advertising, and cloud sectors, Wall Street's consensus rating for Alphabet remains a "strong buy," with 33 analysts recommending a "buy," six rating it a "hold," and no one recommending a "sell." The average target price has risen to $202.88, representing a potential 11% upside.
Some analysts pointed out that Google's price-to-earnings (P/E) is 21 times the market's generally expected earnings in 2025, which is still attractive to the "Seven Sisters of Technology". Brokerage Wedbush said, "Considering the strong performance of the underlying digital advertising market and the improvement of artificial intelligence monetization capabilities, which will continue to help Google's advertising and cloud computing businesses, we believe that the current valuation is not high."
In the second quarter, Alphabet's total revenue increased by 13.6% year-on-year to $84.74 billion from $74.6 billion in the same period last year, higher than analysts' expectations of $84.37 billion. Adjusted earnings per share increased by more than 31% year-on-year to $1.89, also higher than the expected $1.84.
This also means that both revenue and profit growth have declined compared to the first quarter.At that time, Google's parent company's revenue increased by 15% year-on-year to US$80.54 billion, the fastest growth rate in two years since the beginning of 2022. EPS surged 61.5% year-on-year to US$1.89, and net profit jumped 57% to US$23.66 billion. Net profit in the second quarter fell slightly from the previous quarter to US$23.62 billion, an increase of 28.6% year-on-year and better than the expected US$22.9 billion.
However, since its total revenue resumed double-digit year-on-year growth for the first time in more than a year in the third quarter of 2023, Alphabet's revenue has maintained this relatively optimistic high-speed growth for four consecutive quarters. Since the second half of 2022, the growth rate has fallen to single-digit percentages for four consecutive quarters, mainly due to advertisers' spending weakening due to soaring inflation and the Federal Reserve's aggressive interest rate hikes.
The traffic acquisition cost (TAC) that Google paid to its partners in the quarter was $13.39 billion, lower than the market expectation of $13.54 billion, which had an impact on profits. The operating profit margin expanded from 29% in the same period last year to 32%, the same as in the first quarter. Revenue after deducting TAC was $71.36 billion, higher than the market expectation of $70.7 billion.
In terms of the much-watched AI investment, Google's capital expenditure in the second quarter was US$13.186 billion, exceeding the US$12 billion in the first quarter.
In the first quarter report, Google's parent company predicted that the amount of quarterly capital expenditures for the whole year would be equal to or greater than the first quarter level. CEO Sundar Pichai said at the time that artificial intelligence would affect the "entire company" and would be costly. Some people expect Google's total capital expenditures this year to be as high as $50 billion, or a 56% jump from last year's $32 billion.
Ruth Porat, Alphabet’s chief investment officer and soon-to-be-outgoing CFO, said in an earnings call:
“We do see strength in Alphabet in AI, AI infrastructure, and generative AI solutions for cloud customers. There’s no doubt that customers will look to us for help as they expand their capabilities.”
The company declined to comment on its decision to abandon the Wiz deal and has been exploring "diversification" of its business portfolio by acquiring other companies.
CEO Pichai praised the "continued strength of the search business and the momentum of the cloud business," saying that the self-driving car division Waymo is making 50,000 paid trips per week. More than 1.5 million developers use Google's big model Gemini tool.
In terms of business,The cloud business, which is the most concerned by the market and is regarded as Google's next growth engineRevenue in the second quarter increased 29% year-on-year to $10.35 billion, exceeding market expectations of $10.09 billion. Operating profit tripled to $1.172 billion, or nearly 200%, compared with $8 billion and $395 million in the same period last year, respectively.
This is also the first time that Google Cloud has achieved quarterly revenue of more than $10 billion and operating profit of more than $1 billion.Company executives confirmed on an earnings call that cloud revenue was boosted by demand for artificial intelligence (AI).
Although Google Cloud is still catching up with the market share of the industry's top two competitors, Amazon AWS and Microsoft Azure, its revenue from this business grew 28.4% year-on-year to US$9.57 billion in the first quarter. It had grown 25.7% in the fourth quarter of last year, doubling the overall revenue growth rate for several consecutive quarters.
The core advertising business is also the main revenue driver of Google, which is closely watched by Wall Street, but growth slowed in the second quarter.Total revenue increased 11.2% to $64.62 billion from $58.1 billion in the same period last year, slightly exceeding market expectations of $64.53 billion, but lower than the overall advertising revenue growth in the first quarter, which increased 13% year-on-year to $61.66 billion.
Among them, advertising revenue from YouTube video platform increased by 13% year-on-year to $8.66 billion in the second quarter, lower than the market expectation of $8.95 billion. Google search and other revenue increased by nearly 14% year-on-year to $48.51 billion, exceeding the expected $47.65 billion. Google network revenue fell by more than 5% year-on-year to $7.44 billion, also weaker than the expected $7.87 billion.
Company executives said search contributed the most to total revenue growth, with search growth particularly strong in the retail sector. Earlier analysis said Google's core advertising business had weakened due to economic weakness and increased competition from TikTok in 2022, but since it announced negative growth in the fourth quarter of 2022, advertising revenue has been steadily improving.
At the same time, Google's second-quarter revenue from subscriptions, platforms and devices was US$9.31 billion, slightly lower than the expected US$9.38 billion. Combined with advertising revenue, Google's service revenue increased 11.5% year-on-year to US$73.93 billion, higher than the market expectation of US$73.58 billion.
In addition, "Other Bets" was once Google's technology innovation department, focusing on forward-looking product development andVenture Capital, including autonomous driving startup Waymo, smart medical Verily, venture capital funds Google Capital and Google Venture, etc.
The revenue of this business increased by 28% year-on-year to US$365 million in the second quarter, which was weaker than the market expectation of US$389.6 million and significantly weaker than the nearly 72% revenue growth in the first quarter of this year. Operating losses widened to US$1.13 billion from US$800 million in the same period last year. In the second quarter, Waymo opened its service to all San Francisco users, the second time it has been fully promoted in a city after Phoenix in 2020.
Google's parent company Alphabet and Tesla, which released their financial reports on the same day, can be said to have taken the lead in opening the second quarter reports of US tech giants. Last week, tech stocks just suffered a large-scale sell-off, with the Nasdaq retreating 3.7%, the largest weekly drop in three months, and the chip stock index and "AI darling" Nvidia falling nearly 9% in a single week.
If Google's financial report is as positive as market expectations, it will prove that large-scale AI spending can continue to drive revenue growth in cloud computing and advertising businesses, helping to break the cautious market atmosphere. It will be enough to have a positive impact on cloud computing giants such as Amazon and Microsoft, and even Nvidia, the core hardware supplier behind AI. It can also boost the share price of Meta, a competitor in the digital advertising industry.
The consensus among analysts is that whether and when artificial intelligence will generate meaningful revenue contributions, the health of advertising spending and the overall industry recovery progress, as well as the cost of AI investments that may depress profit margins are all top priorities in this earnings report.
Wall Street generally believes that the growing demand for artificial intelligence generated by integrating generative AI into products may continue to boost its cloud business revenue in the coming quarters. At the same time, advertising revenue led by search and YouTube is also improving in line with industry trends.
Google's advertising revenue will benefit from artificial intelligence improvements to its core search business, as well as from traditional major ad spending events such as the Summer Olympics and the November U.S. presidential election. Google launched a search feature called "AI Overview" in May this year, which generates a summary and summary at the top of the search results page by AI, but the accuracy of the content needs to be improved.
Justin Patterson, an analyst at KeyBanc Capital Markets who gave Alphabet an overweight rating and a target price of $200, said that AI Overview is still an emerging product, but it feels like it is encouraging more user search behavior, and believes that it will bring more targeted advertising over time, thereby supporting the growth of Google's core search business. Google Cloud will also benefit from the development of artificial intelligence.
Jefferies analyst Brent Thill said that the fundamentals remain healthy, advertising spending is healthy and similar to or better than the first quarter of this year, and Google's paid search growth rate will reach about 15%:
“However, it is too early to expect benefits from AI now as most companies are still in pilot mode, and substantial AI revenue is more likely to be achieved in 2025-2026.”
Wedbush analyst Scott Devitt is equally optimistic about Google Search's continued strong momentum, believing that the AI overview feature can create incremental user engagement and could become a driver of search business monetization over time.
Dan Ives, another well-known technology analyst from the same brokerage firm, gave an "overweight" rating and a higher target price of $205, saying that negative surprises related to capital expenditures remain a risk for Google and all large Internet companies, but the possibility of them appearing in the second quarter report is relatively low because people have a better understanding of the surge in capital intensity of investing in AI and have long adjusted market expectations.
But KeyBanc pointed out that Alphabet still faces uncertainties such as the U.S. Department of Justice's antitrust lawsuit against its advertising technology business which will go to trial in September, the upcoming U.S. presidential election, and the unknown duration of the huge capital expenditure cycle related to AI.
At the same time, the second quarter report is the last full quarterly report before Alphabet CEO Ruth Porat is transferred to the company's president and chief investment officer, and the new CFO Anat Ashkenazi takes office at the end of July. Some analysts expect that "efficiency" will be the focus of the earnings call, and the new CFO may further cut down the bloated organizational structure.
In addition, before the financial report was released, the cybersecurity startup Wiz just rejected Google's $23 billion acquisition proposal and continued to pursue independence.IPOGoogle recently concluded its pursuit of acquiring customer relationship management software maker HubSpot. Wall Street will certainly pay attention to management's comments on M&A dynamics and the latest progress of Waymo's autonomous driving technology during the earnings call.
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