Table of contents
For a long time, Alphabet was able to shine with double-digit revenue growth, contrary to expectations. This is now over for the time being, but the outlook for the full year 2022 is quite inviting compared to the original fears. Especially in areas where the competition was weakening, the company was able to continue to record high growth rates and is now also focusing even more on the monetization of their developments in the AI area. Of the large tech companies with an "A", I still see the brightest future for Alphabet.
Expectations slightly missed
Although Alphabet missed analysts' consensus estimates, the stock defended recent gains and currently has a market capitalization of $1.36 trillion.
In terms of sales, $76.05 billion was achieved instead of the $76.57 billion expected by analysts. An increase of 1% compared with the prior-year quarter (YoY). However, the strong dollar again had a negative impact on earnings. If growth had been considered on the same currency basis, it would have been significantly higher at 7%. On a full-year basis, sales increased by 10% and 14% respectively on a like-for-like currency basis.
Earnings per share fell by 31% to $1.05, lower than the expected $1.19. Here, too, a special effect should be noted. In Q4 of last year, among other things, an unrealized gain on securities of 2.5 billion still had a positive effect on earnings. Now there is a loss of one billion in the same place. To guard against the overstatement of such one-time effects, we should always look at operating margin or operating income, as this filters out effects not directly related to the business model. Operating income fell by around 17%, much less than profit. On a full-year basis, operating income decreased by just under 5% despite significantly higher sales. This was due to a sharp rise in research and development costs and a higher cost of revenues. Much of this was due to a significant increase in the number of employees. Layoffs were already announced in January. 12000 of the 190000 jobs are to be eliminated. In addition, Alphabet announced to increase the depreciation period of its servers and certain network components to 6 years. This is an effect that is purely cosmetic, but will provide for 3.4 billion lower reported costs, split between cost of revenues and R&D. We have seen something similar before with Amazon and Microsoft.
View of the segments
Google Services
When looking at the individual segments, it is also important to bear in mind that exchange rates work strongly to the Group's disadvantage. Nevertheless, low single-digit growth ex currency effects is not something that demonstrates strength. This was also the opinion of Merrill Lynch analyst Justin Post, who asked about the reasons for the slow growth in the earnings call. CEO Sundar Pichai was unsurprisingly able to pinpoint lower advertising spending by their customers as the main reason. '
YouTube, which is also part of the Google Services segment, failed to grow in Q4, also due to lower advertising spend. A distinction must be made here between YouTube Ads and the B2C services. YouTube Music Premium and YouTube TV recorded significantly more subscriptions, which was largely responsible for the growth in the "Google Other" segment. In the case of YouTube Ads, moreover, the monetization of YouTube Shorts, which are to be understood as a competitor product to Instagram Reels and TikTok, could soon serve as a positive catalyst for this segment. The expansion of shorts is currently YouTube's main focus. Within a year, average daily views have risen from 30 billion to 50 billion. YouTube Shorts can therefore definitely be considered a serious competitor for TikTok. The potential here remains enormous. In the year as a whole, YouTube generated 29.24 billion in advertising revenue alone, almost as much as Netflix, which is valued by the market at an enterprise value of around $170 billion and has to pay dearly for its content, while people like me create content for YouTube for free.
Google Cloud
The year-on-year growth at Google Cloud was again pleasingly strong. The division grew by 32% in Q4 and 37% for the year as a whole. This market is still clearly growing, but is also particularly competitive with the strong competition from Amazon and Microsoft. Amazon AWS in particular weakened somewhat in terms of growth in the figures reported a few days ago, although revenue growth in absolute terms remains well ahead of Google Cloud. Microsoft remains roughly on par. However, Amazon's stock price is much more dependent on the cloud division than Alphabet's, as it is currently Amazon's only profitable segment.
In contrast to the competition, the Google Cloud continues to be a loss-making business, which is hardly surprising since Alphabet only entered the cloud business comparatively late. The costs increase at the beginning and then gradually decrease in relation. This is also noticeable at Alphabet now. The margin is improving visibly and it seems to be only a matter of time before we see at least a black zero. Especially due to the adjustment of the depreciation period for servers and other equipment, which plays a significant role here, this should be the case sooner than expected. On the other hand, the people who have put multiples of 40 over the EBIT of Amazon AWS for the purpose of valuation are increasingly looking down the tube.
A weak point in Amazon's favor is that they continue to apply only a 5-year depreciation period for their servers, which visually results in higher costs, but should have a positive impact later on. Alphabet previously had a depreciation period of 4 years. The adjustment makes it much easier to compare the three competitors from Q1-2023.
Other Bets & Segment Change
The "Other Bets" segment, which at Alphabet acts as a reservoir for innovative ideas that may one day become profitable business models, was able to increase its revenue, but even more significantly its operating loss. Subsidiaries such as Waymo, the provider of an autonomous cab service, are still gobbling up a lot of money without generating any significant revenue. Alphabet remains very consistent here, however, and CFO Ruth Porat continued to defend spending on the call when asked by a Goldman Sachs analyst, emphasizing that all ideas are consistently focused on returns and should support the overall portfolio. For example, in the past when Chronicle was removed from the "Other Bets" segment and merged with the Cloud business.
And to underline this idea, this is now on the agenda again. The AI company DeepMind will be removed from the "Other Bets" segment and henceforth integrated into the costs of the other segments, since it is relevant for many of the other segments according to Pichai's statement and acts supportively there. That also seems to me to be quite a sensible change. In general, the CEO emphasized that artificial intelligence will be 'the' big undertaking for Alphabet in the coming years. Now, I could replay in glowing colors the CEO's words, but my qualitative understanding of this topic is close to 0, so I'll spare us. I'll stick to what I can judge.
Free cash flow
Alphabet itself reports the free cash flow for Q4 at 16.02 billion and takes the operating cash flow and subtracts the CapEx (capital expenditures) from it. Of course, we are not satisfied with this calculation and adjust it for the very high stock-based compensation (the reasons for this I have already mentioned in a Article presented) and the movements in working capital. This results in an operating cash flow of 18.23 billion. After deducting CapEx, free cash flow amounts to 10.63 billion.
For the full year 2022, the same calculation method results in free cash flow of 42.88 billion. This is significantly less than the 60 billion reported by the company itself. A good reason not to rely on the figures of typical stock screeners. In the previous year, adjusted using the same methodology, it was 53.16 billion US dollars. This compares to an enterprise value of about 1.3 trillion. With an EV/FCF ratio of 30, I don't necessarily have to have Alphabet at the moment, but I don't want to talk about "too expensive" either.
Conclusion
Alphabet reported on the same day as Amazon and Apple, and I see Alphabet as much more solid and broadly positioned for the future than either competitor. The growth is still there and Alphabet is just finding the middle ground between cutting costs and investing very heavily in future industries. I do not dare to evaluate individual future technologies, so I stick to what I can see at the moment and I still like it. The free cash flow is there, the growth ex currency effects as well, the cloud division close to profitability, the valuation not completely out of touch. There are certainly worse stocks to have in the portfolio at the moment. However, it is certainly not a 'must' for me at this valuation.
Book recommendation for beginners*:
Book recommendation for far advanced students*:
My book recommendations* for stock valuation
For beginners:
For advanced users:
For advanced users:
For very far (!) advanced users:
Disclaimer: The author assumes no liability for the topicality, correctness, completeness or quality of the information provided. Liability claims against the author, which refer to material or immaterial nature caused by use or disuse of the information or the use of incorrect or incomplete information are excluded, unless the author is not intentional or grossly negligent fault. The author expressly reserves the right to change, supplement or delete parts of the pages or the entire offer without prior notice or to temporarily or permanently cease publication. The investment products and securities discussed in blog entries or other online publications are for illustrative purposes/opinion only and do not constitute investment recommendations. No liability is assumed for any losses.
Kommentar verfassen
The debts of the car manufacturers - Why VW, BMW & Mercedes are 'not' over-indebted
The massive over-indebtedness of classic car manufacturers is a myth that has now bravely persisted for years. Unfortunately, the differences to other companies are all too often forgotten.
Stock-Based Compensation - Why stock-based compensation also reduces free cash flow
Looking at companies' quarterly and annual figures, one gets the impression that share-based compensation for employees has no impact on free cash flow. At first glance, this seems to be the case, but a second look reveals a different picture. You can find out exactly what that is in this article.
English 
German 
Stay connected