Alphabet Inc., the parent company of Google, reported fourth quarter results on January 30th that beat Wall Street profit expectations but fell short on advertising revenue growth, causing the stock to drop in after-hours trading.
Key Fourth Quarter Financial Results
- Revenue rose 1% year-over-year to $86.3 billion, below analyst forecasts of $87 billion
- Earnings per share came in at $1.05, exceeding expectations of $1.18 per share
- Advertising revenue was $59.04 billion vs expectations of $60.9 billion
- YouTube ad revenue rose 16% year-over-year to $9.2 billion
- Google Cloud revenue grew 32% to $7.3 billion, below the estimated $7.4 billion
“We’re focused on responsible AI principles and giving users choice, control and transparency to build trust,” said Sundar Pichai, CEO of Alphabet and Google on the earnings call. He emphasized investments in AI that are driving improvements in search, Maps, Translate and other services. Pichai also cited strong growth for subscription services like YouTube Premium and highlighted the Pixel phone as a driver of hardware sales.
The advertising revenue miss comes amid a shaky economic environment that led companies to pull back on marketing budgets toward the end of 2022. Chief Business Officer Philipp Schindler said some advertisers paused spend or reduced second half budgets, especially in areas like financial services, insurance, media and entertainment.
However, Alphabet beat earnings expectations through operational efficiency, including job cuts announced earlier in January that will impact around 12,000 employees. The company repurchased $13.2 billion of its Class C stock in Q4, nearly double the prior quarter amount. This helped boost overall profitability.
Alphabet Stock Drops Over 4% After Hours
Despite the mostly positive report, shares of Alphabet dropped 4.7% in extended trading immediately following the earnings release. This wiped over $50 billion from the company’s market valuation, showing investors are concerned about slowing advertising revenue relative to expectations.
The stock drop comes amid a difficult past year for many tech giants. Alphabet stock declined nearly 30% in 2022, though it has recovered some losses so far in 2023. Heading into the latest quarterly report, expectations were building around a potential turnaround driven by AI, enterprise cloud and Google’s core search advertising business.
| Share Price Change | Amount | Percent |
|---|---|---|
| After Hours | -$50.19 | -4.7% |
| Year-to-Date | +$13.16 | +1.3% |
| 2022 | -$97.84 | -29.4% |
If negative momentum continues Wednesday when regular trading resumes, Alphabet could give back its early 2023 gains and dip into negative territory year-to-date. This underscores a reversal in tech stock optimism coming out of 2022’s bear market.
What Analysts Are Saying About the Results
In notes to clients, analysts pointed to disappointing advertising numbers as the main concern. Though earnings topped views, decelerating growth in Google’s cash cow business signals challenges converting free users into paying subscribers.
Morgan Stanley analyst Brian Nowak said macro pressures have not dissipated as quickly as expected. Advertisers are taking a more cautious stance early in 2023 until gaining confidence economic headwinds will abate.
Others struck a more positive tone regarding Alphabet’s long-term positioning. According to Ivan Feinseth of Tigress Financial Partners, the company remains well-situated to benefit from recovering ad spend over the course of this year.
Most experts already baked slowing revenue assumptions into their models given the cloudy economic picture. Top analysts covering the stock currently have average 12-month price target of $129, implying 20% upside from current levels.
Outlook Still Strong Despite Short-Term Advertising Woes
Alphabet disclosed another profitable quarter capping a year of steady free cash flow generation and now has over $100 billion in cash reserves. Though the latest period showed some cracks emerging in advertising, the company is still enormously profitable with entrenched positioning across digital media.
YouTube ad sales rose 16% in 2022 to reach $29.2 billion, demonstrating continued momentum for streaming video platforms. Meanwhile, subscription services like YouTube Premium and YouTube TV also saw “significant growth” according to CFO Ruth Porat. These two areas now generate around $15 billion in high-margin annual revenue.
Porat said Google Cloud is on-track to become Alphabet’s third multi-billion dollar business after advertising and subscription services. Its backlog now exceeds $80 billion, giving management confidence it can sustain over 30% revenue growth in 2023.
While the post-earnings stock drop reflects worries over slowing ad momentum in the near future, Alphabet has levers to keep driving double-digit gains over the long run. Its dominance in search remains intact and AI promises to unlock new business opportunities. For investors with patience, the leading internet company still warrants a place in a well-diversified portfolio.
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