Should I buy Alphabet shares after a strong earnings report?
I own Alphabet (NASDAQ:GOOG) shares in my portfolio. Earlier this week, the company reported its earnings for the first quarter of 2023.
Such updates give me a chance to keep track of how my investments are matching up to my expectations. And then I can work out whether or not the stock is a buy for me.
Before I buy shares in a company, it’s important for me to have a view about what the future prospects for the underlying business are going to be. That’s a pre-requisite for any investment.
Having an idea of the outlook for a company is the only way for me to figure out how I’m going to get a return on my investment. And earnings reports let me check things are going in the right direction relative to my expectations.
In general, Alphabet is a company I’m expecting growth from. And the fact that the stock trades at a price-to-earnings (P/E) ratio of 23 suggests I’m not the only one.
There are three main ways for a business like Alphabet to grow. One is by generating higher revenues, another is by cutting costs to improve margins, and the third is by buying back shares.
Over the last three months, I was expecting a focus on margins. Revenue growth looked like a challenge to me with the prospect of a recession and I wasn’t sure what to expect in terms of buybacks.
So how has the company been doing? And should I be looking to add to my investment, sell my stake, or do nothing as a result?
Alphabet’s revenues came in 3% higher than a year ago. That’s not a big increase, but I didn’t expect much at a time when advertisers are naturally looking to be a bit more cautious with their spending.
Overall, I view the fact that Google’s search revenues kept moving forwards as a positive. And the increase in YouTube subscription revenues counts as a significant positive for the quarter.
Despite the company pushing to make itself more efficient since January, operating margins fell from 30% in 2022 to 25% this year. But it’s worth noting there were some extraordinary factors contributing to this.
Around $2.5bn in costs came from the company operating staff and office costs reduction drive, which should give margins a boost over time.
Meanwhile, Google Cloud turned a profit for the first time, which is encouraging.
Share buybacks came in much higher than I expected, though, with $70bn announced. There’s no specific timeline, but for context, the company spent around $14.5bn on repurchases between January and March.
Stock-based compensation still seems to be going up and there’s a risk this could dampen the effect of the buybacks. But, in my view, the accelerating pace of repurchases is nonetheless a significant positive.
A stock to buy?
Alphabet is firmly on my list of stocks to buy more of at the moment. I believe there’s significant room for earnings growth ahead of the company.
The stock isn’t cheap, which is always a risk, but I think it’s facing a number of challenges that I hope are temporary. As these subside, I’m expecting higher revenues, wider margins, and a lower share count to make this a great investment.
The post Should I buy Alphabet shares after a strong earnings report? appeared first on The Motley Fool UK.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stephen Wright has positions in Alphabet. The Motley Fool UK has recommended Alphabet. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023