We’re boosting our price target on Alphabet by $30 after it delivered the quarter we’ve been waiting for
0 3
Alphabet on Thursday delivered a knockout first-quarter report, with sales, operating margin and profits all topping Wall Street expectations. The search giant also reloaded its stock buyback program and initiated a quarterly dividend for the first time in its history. Total revenue in the three months ended March 31 rose 15.4% year over year to $80.54 billion, outpacing the $78.59 billion expected, according to estimates compiled by data provider LSEG. Earnings per share surged 62% on an annual basis to $1.89, exceeding the $1.51 expected, LSEG data showed. Alphabet Why we own it : Alphabet’s Google Search is an invaluable tool for advertisers. Its YouTube platform continues to gain screen time with viewers and stands to grow even more as the company looks to acquire major league sports rights. Though it did get off to a bumpy start, we believe Alphabet to be a leader in artificial intelligence research and see progress aiding cloud-computing growth over time. Competitors : Amazon , Microsoft and Meta Platforms Weight in portfolio : 2.73% Most recent buy : March 4, 2022 Initiated : July 22, 2014 Bottom line This is the earnings report we’ve been waiting for. Management finally delivered strength on the most important line items, and shares are understandably flying nearly 12% in extended trading. Alphabet’s big three watch items for investors — Search, YouTube, and Google Cloud — all delivered better-than-expected revenues in the quarter, leading to companywide sales topping estimates. Meanwhile, earnings outpaced expectations due, in large part, to a very strong operating margin of 31.6%. Management has continued to lower its cost base, which translated to strong profitability across the board. Operating income topped estimates in its Google Services segment, which is home to the search-engine business and YouTube, and in cloud-computing division Google Cloud. And its Other Bets unit, which houses speculative initiatives such as self-driving car company Waymo, reported less-than-expected losses. Cash flow generation came up a bit short versus expectations, but management still had the confidence to initiate a quarterly cash dividend of 20 cents per share and its board of directors authorized an additional $70 billion share repurchase program. Alphabet joins the likes of Meta Platforms and Salesforce as Club-owned tech companies to initiate a dividend this year. It’s no stranger to buybacks, having spent $61.5 billion on them last year, but the fresh firepower is appreciated. GOOGL YTD mountain Alphabet’s year-to-date stock performance. Alphabet CEO Sundar Pichai added to the list of positives Thursday during his prepared remarks when he said YouTube and Google Cloud were on pace to exit the year at combined annual revenue run rate north of $100 billion. This implies the two segments will have quarterly revenues totaling at least $25 billion by year-end. Alphabet has tested our patience during the generative artificial intelligence race, but we never bailed on the position completely because we believed the company had what it takes to deliver for shareholders. On Thursday night, Alphabet finally jumped over the high bar we set for megacap tech companies. Paired with encouraging updates on its AI strategy earlier this month, perhaps we’ve reached a turning point. In light of Thursday’s stellar report and dividend announcement, we are increasing our price target to $190 per share from $160. Our 2 rating on the stock remains. Quarterly commentary Better-than-expected search revenues of $46.16 billion were led by advertisers in the retail industry, CFO Ruth Porat said on the earnings call. To be sure, she noted they are seeing “broad based strength across verticals.” The strength in YouTube was attributable to outperformance in both direct response and brand advertising. Monetization of YouTube Shorts — the company’s short-term video feature that rivals TikTok and Meta’s Reels — continues to improve with ads now supported on mobile, tablet, living room and desktop, according to Chief Business Officer Philipp Schindler. Pichai said YouTube’s subscription offerings also are doing well. YouTube surpassed 100 million Music and Premium subscribers globally including trialers, he said. Meanwhile, its television streaming service, YouTube TV, now has more than 8 million paid subscribers. Google Cloud growth of 28% represented a sequential acceleration from the final three months of 2023, when revenues grew 25.7%. Notably, management said the unit benefited from an “increasing contribution” from AI — a welcome sign for investors considering its heavy investments in the buzzy technology. “The growth we are seeing across Cloud is underpinned by the benefit AI provides for our customers,” Porat said. Alphabet’s operating cash flow was a tad light, but it still came in well above net income of $23.66 billion. That’s a sign of high-quality earnings backed by cash. Capital expenditures of $12.01 billion were well above estimates, but we’re not taking issue with it due to the strength across the business and the fact the spending was driven by investments in technical infrastructure, which includes AI servers and data centers. The capex figure explains why free cash flow of $16.84 billion came in a bit below expectations. Even so, the company generated an incredible amount of cash to support investments in future growth initiatives such as AI while still returning large sums to shareholders. Capital returns In the January-through-March quarter, Alphabet returned nearly $14.6 billion to shareholders through buybacks, partially offset by $5.3 billion in stock-based compensation. It exited the quarter with $108 billion in cash, cash equivalents and marketable securities on its balance sheet, compared with $110.9 billion at the end of 2023. Alphabet’s first-ever dividend will be paid June 17 to shareholders who own the stock as of June 10. At 20 cents a share, Alphabet’s dividend yield stands at 0.51% based on Thursday’s close. That’s on par with the likes of Meta and Apple . (Jim Cramer’s Charitable Trust is long GOOGL, AMZN, MSFT, META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Sundar Pichai, CEO of Alphabet, during the Google I/O Developers Conference in Mountain View, California, May 10, 2023.
David Paul Morris | Bloomberg | Getty Images
Alphabet on Thursday delivered a knockout first-quarter report, with sales, operating margin and profits all topping Wall Street expectations. The search giant also reloaded its stock buyback program and initiated a quarterly dividend for the first time in its history.
Read the full article here
0 3