Alphabet's Q1 YouTube Softness Is Temporary

 

Alphabet (GOOG) (GOOGL) reported mixed first-quarter results, with revenue coming in slightly below FactSet consensus estimates while operating margin and income came in above expectations. We are maintaining our $3,600 fair value estimate for wide-moat Alphabet and view the stock as attractive.

Strong growth in search advertising and cloud was partially offset by higher-than-anticipated deceleration at YouTube. Management expects continued deceleration in YouTube and overall ad revenue growth in the current quarter. The firm also announced authorization of a $70 billion share buyback, which we believe is appropriate, as the stock is trading at only 0.66 times our fair value estimate and further supports our Exemplary capital allocation rating.

Total first-quarter revenue increased 23% year over year, driven by 20% and 44% growth in services and cloud, respectively. Within services, continued increases in brand advertising among retailers and travel firms lifted search advertising revenue 24.3% from last year. Total ad revenue increased 22.3% as strength in search was partially offset by weaker growth in YouTube ad revenue (up 14.4%) mainly due to lower direct response ad growth, which management attributed to a tough comparison with the first quarter last year.

While YouTube’s ad revenue growth was a bit disappointing, we believe the platform remains well positioned to further monetize content and viewers, despite increased competition from social networks like Meta, Snap, Twitter, and Pinterest plus newcomers like TikTok. We expect growth will likely begin accelerating in the fourth quarter. Importantly, viewership has not been affected by competitors, as according to the firm, YouTube has maintained its more than 2 billion monthly active users, which we believe will continue to attract content creators. Also, YouTube Shorts, the effort to battle TikTok, is progressing, attracting more than 30 billion views per day, which is 4 times greater than last year.

 

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