Alphabet Earnings: Search Ad Revenue Growth, Continuing Strength in Cloud Impress

Alphabet Stock at a Glance

• Current Morningstar Fair Value Estimate: $154.00
• Stock Star Rating: 4 Stars
• Uncertainty Rating: High
• Economic Moat Rating: Wide

Alphabet Earnings Update

We are maintaining our $154 fair value estimate for Alphabet GOOGL following first-quarter results.

We were impressed by Google Search advertising revenue growth; continuing strength in the cloud business, which is making headway toward profitability, likely next year; consolidated margin expansion for the first time in three quarters; and the latest authorized share buyback. However, YouTube Shorts continues to pressure overall YouTube advertising revenue. Economic uncertainty pushed network ad revenue lower. Plus, increasing competition on the artificial intelligence side, whether in the cloud or the advertising segment, is forcing the firm to keep investing in enhancing computing capabilities. Nevertheless, we believe Alphabet has the necessary technology and talent to successfully battle AI competitors, especially on the search side.

Overall, we believe Alphabet is well positioned to benefit from an improving economic climate, which will accelerate ad spending. On the bottom line, while capital expenditure will not go down this year, the firm’s focus on efficiency should help expand margins beginning in 2024. We continue to view this wide-moat firm as undervalued.

YouTube Ad Revenue Growth Seen Improving

Alphabet generated $69.8 billion in total revenue during the first quarter, up 2.6% year over year. Advertising revenue declined less than 1% from last year due to continuing weakness in YouTube and network ad revenue, offset by 1.9% growth in search.

We continue to expect YouTube ad revenue growth to pick up in the second half of the year as YouTube Shorts monetization improves and economic uncertainty lessens. In our view, uncertainties are currently driving advertisers to purchase more on walled-garden properties such as Google’s as they continue to attract users, which then reduces demand for Google’s ad tech offerings to place ads on general internet sites, affecting network revenue.