Alphabet reported a 15% rise in second-quarter revenue to $84.7bn, ignoring the effect of exchange rates. The core advertising business, which includes Google search and YouTube, saw revenue rise 11% to $64.6bn. Google Cloud revenue was up 29% to $10.3bn.
Operating profit was up 26% to $27.4bn, reflecting higher revenue and strong cost control. Margins rose 3 percentage points to 32%.
Free cash flow generated was $13.5bn, while Alphabet had net cash of $87.5bn as of the end of June, down from $97.7bn at the start of the year.
Management said revenue growth will get tougher over the second half due to stronger comparable periods last year. Plus, the ramp-up in AI investment is expected to impact margins in the coming quarter.
The shares fell 3.1% in pre-market trading.
Our view
Alphabet's a dominant force in its markets, but it faces a new challenge of answering two key questions. Can AI drive a material improvement in performance? And can Google retain its stranglehold over Search in an AI world?
Markets were a little unhappy with some of the second quarter's forward-looking statements that suggest the rest of the year might be tricky. But we think there are early signs that the answer can be yes to both of those key questions.
The strength of Google search over the second quarter is a sign that AI may already be delivering incremental improvements. AI has been integrated directly into Search in certain regions and user data suggest increased usage as a result. Advertisers are also seeing benefits from using Alphabet's suite of AI tools to help boost engagement. Both trends can help Alphabet generate higher revenue.
The tech giant is an advertising business at its core. Marketers spend handsomely to put their products and services in front of Google and YouTube's captive audiences. Advertising revenue growth had looked like it might be softening as the market matured, but that doesn't look to be the case.
The scale and importance of the Cloud business continues to rise. It's been a huge benefactor of the AI wave. But this is the main area of concern for those not quite on board with the AI revolution. Enterprises are increasing their cloud spend to build out new capabilities, but the end products aren't here. At some point, there needs to be a tangible return on investment for customers of Google Cloud, or spending will dry up.
Alphabet is investing heavily in increasing its Cloud infrastructure to handle future demand. Those costs don’t pass straight through the income statement in one go, instead, it's added to the balance sheet and drip-fed through over time. That's expected to be a hit to margins over the coming quarters. Cost controls are in place to try and limit the damage, but it's a tough ask to have that fully offset the impact.
The balance sheet is a source of major strength, with close to $90bn of net cash waiting to be unleashed. The issue is finding something to buy. Mega acquisitions for Alphabet are a tough ask, with regulators acting as a tough hurdle to overcome. The recent rumours of an unsuccessful bid for cyber giant Wiz perhaps show some intent to increase exposure in that space, where it lags key rivals Microsoft and Amazon.
It's hard to know whether the AI revolution will be a tide that lifts all boats or whether certain names will flourish. But Alphabet's products look well placed, with dominant positions from which to grow. Competition, regulation, and the lack of large-scale tangible AI use cases are all immediate risks.
Environmental, social and governance (ESG) risk
The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.
According to Sustainalytics, Alphabet’s overall management of material ESG issues is average.
Monopoly and market dominance concerns are a key regulatory risk. It remains the subject of antitrust investigations in several countries, leading to calls from both EU and US regulators for the breakup of its online advertising business. Alphabet’s management of data handling is strong, aided by its deep pockets. But this remains a key risk to monitor in the evolving landscape of AI.
Alphabet key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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