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Alphabet (GOOGL) Up 16.6% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Alphabet (GOOGL). Shares have added about 16.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Alphabet due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Alphabet Earnings Beat Q1 Estimates

Alphabet’s first-quarter 2023 earnings of $1.17 per share beat the Zacks Consensus Estimate by 10.4%. The figure declined by 4.9% year over year.

Revenues of $69.8 billion increased 3% year over year (6% at constant currency).

Net revenues, excluding total traffic acquisition costs or TAC (the portion of revenues shared with Google’s partners and amounts paid to distribution partners and others who direct traffic to the Google website), were $58.1 billion, which surpassed the consensus mark of $57.2 billion. The figure rose 3.7% from the year-ago quarter’s level.

TAC of $11.7 billion was down 2.2% year over year.

Top-line growth was driven by the solid momentum in GOOGL’s cloud business and improvements in the Search performance.

Alphabet witnessed sluggishness in YouTube ads and Google Network ads due to a slowdown in digital advertisement spending. This remained a major concern. Also, softness in the Other Bets segment was a negative.

Alphabet’s growing investments in AI, strong efforts to boost Search business and expanding cloud services portfolio, which is expected to yield huge returns in the days ahead, remain major positives. This, in turn, is expected to instill investor optimism in the stock in the days ahead.

The company has announced a massive $70 billion share repurchase plan. This remains a major positive.

Segments in Detail

Alphabet reports revenues under Google Services, Google Cloud and Other Bets.

Google Services:

Revenues from the Google Services business increased 0.8% year over year to $61.96 billion, accounting for 88.8% of the total revenues.

Under this business, search revenues from Google-owned sites increased 1.9% year over year to $40.36 billion.

YouTube’s advertising revenues declined 2.6% year over year to $6.7 billion, while Network advertising revenues decreased 8.3% to $7.5 billion.

Total Google advertising revenues fell 0.2% year over year to $54.5 billion and accounted for 78.2% of the total revenues.

Google’s Other revenues, consisting of Google Play and YouTube non-advertising revenues, were $7.4 billion for the first quarter, up 8.8% year over year.

Google Cloud:

Google Cloud revenues rose 28% year over year to $7.45 billion, accounting for 10.7% of the quarter’s total revenues.

Other Bets:

Other Bets’ revenues were $288 million, down 34.5% year over year and accounted for 0.4% of the total first-quarter revenues.

Regional Details

EMEA (30.2% of total revenues): GOOGL generated $21.1 billion in revenues from the region, increasing 4% year over year.

APAC (16.7% of total revenues): The region generated $11.7 billion in revenues, down 1% from the year-ago quarter’s level.

Other Americas (5.8% of total revenues): The region generated $4.1 billion in revenues, up 6% on a year-over-year basis.

United States (47.1% of total revenues): Alphabet generated $32.9 billion in revenues from the region, which increased 4% from the prior-year quarter’s level.

Operating Details

Costs and operating expenses were $52.4 billion, up 9.3% year over year. As a percentage of revenues, the figure expanded 459 basis points (bps) from the year-ago quarter’s level.

The operating margin was 24.9%, which contracted 460 bps year over year. Segment-wise, Google Services’ operating margin of 35.1% contracted 60 bps from the prior-year quarter’s level.

Google Cloud reported operating income of $191 million compared with a loss of $706 million in the year-ago quarter.

Other Bets reported a loss of $1.2 billion compared with a loss of $835 million in the prior-year quarter.

Balance Sheet

As of Mar 31, 2023, cash and cash equivalents and marketable securities were $115.1 billion, up from $113.8 billion as of Dec 31, 2022.

Long-term debt was $13.7 billion at the end of the reported quarter compared with $14.7 billion at the end of the previous quarter.

Alphabet generated $23.5 billion of cash from operations in first-quarter 2023 compared with $23.6 billion in fourth-quarter 2022.

GOOGL spent $6.3 billion on capex, netting a free cash flow of $17.2 billion in the reported quarter.

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How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

The consensus estimate has shifted 6.09% due to these changes.

VGM Scores

At this time, Alphabet has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Alphabet has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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