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Alphabet Earnings: Advertising Revenue Growth Disappoints

In mixed set of results, fair value estimate for the stock raised to $171 on higher revenue and margin forecasts.

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What We Thought of Alphabet’s Earnings

The network effect continued to drive growth at Google search and YouTube during the fourth quarter. In addition, as we expected, increasing demand for artificial intelligence accelerated cloud revenue growth. However, continuing weakness in Google’s advertising technology business, or Google network, pressured total advertising growth a bit.

We expect further declines in the network segment this year and next, as we still think that Google’s owned and operated properties remain the top priority for advertisers. We also believe that more advertisers will likely use non-Google ad-tech platforms when they purchase on non-Google properties. This has been a trend for more than 10 years, during which network revenue has declined to 13% of total advertising revenue from nearly 23%.

We have increased our revenue projections for Alphabet GOOGL as the acceleration in cloud revenue growth, further monetization of YouTube, and the continuing steady growth in search likely will more than offset the impact of declining network segment revenue. In addition, we have increased our margin assumptions through 2028, given the cloud segment’s margin expansion and the success of the firm’s overall cost control and efficiency efforts. Our model adjustments result in a $171 fair value estimate, up from $161.

Alphabet reported total fourth-quarter revenue of $86.3 billion, up more than 13% from last year. The growth in search (13%) and YouTube advertising (16%) more than offset the 2% decline in network revenue. Cloud growth accelerated year over year to 26% from 22.5% in the previous quarter as the number of cloud clients and usage per client increased. Strong subscriber growth in YouTube Premium, YouTube TV, YouTube Music, and Google One drove the 23% growth in Google’s other services revenue.

The operating margin expanded more than 350 basis points from the same quarter last year to 27.5%, resulting in an operating income of $23.7 billion.

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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Ali Mogharabi

Senior Equity Analyst
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Ali Mogharabi is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers Internet and software companies.

Before joining Morningstar in 2016, Mogharabi was a senior equity analyst for Singular Research, where he covered the technology and biotechnology sectors. His previous experience also includes roles as a senior equity analyst for B. Riley & Co., associate analyst for Roth Capital Partners, sales consultant for Oracle, and business development consultant for Aerospike.

Mogharabi holds a bachelor’s degree in economics from the University of California, San Diego; a master’s degree in business administration from University of California, Irvine; and a master’s degree in applied economics from the University of Michigan.

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