Alphabet reported a 12% rise in fourth-quarter revenue to $96.5bn ($96.7bn expected).
The core advertising business, which includes Google Search and YouTube, saw revenue rise 10% to $84.1bn. Google Cloud revenue was up by 30% to $12.0bn ($12.2bn expected).
Operating income increased 31% to $30.9bn, with margins expanding by 5%.
Free cash flow generated was $24.8bn, Alphabet had a net cash position of $73.1bn as of the end of December, down from $86.6bn the prior year.
The company also announced plans to significantly increase capital expenditure, expecting to invest approximately $75bn in 2025.
The shares fell 7.2% in after-hours trading.
Our view
We think the poor reaction to Alphabet’s solid fourth quarter results was a little overdone. Cloud growth was a little lower than expected, but at 30% was still strong, and management’s comments that demand is still outstripping supply gives us confidence that the big increase in 2025 investment has merit.
Still, 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 rise of language models presents both an opportunity and risk for the search business. Google search has long been the gatekeeper to the internet, but competition is heating up, and Alphabet faces a genuine challenge of adapting its search proposition to retain that dominance.
The strength of Google search in recent quarters is a sign that AI may already be delivering incremental improvements. AI overviews are rolling out to more users, and the numbers back up commentary that engagement is improving. Advertisers are still getting bang for their buck – which was previously a concern.
The scale and importance of the cloud business continues to rise. It's been a huge benefactor of the AI wave, and with its customer base more aligned to businesses with large datasets and AI needs, it should be better suited than it was during the first wave of cloud buildout where Microsoft and Amazon led the pack.
Alphabet is investing heavily in increasing its cloud infrastructure to handle future demand. It has the cash flows to stomach the increases investment, but over time it will lead to higher cost. The expected hit to margins hasn’t come yet, with impressive efficiency improvements doing their job.
The balance sheet is a source of major strength, with over to $70bn of net cash waiting to be unleashed. The issue is finding something to buy. Mega acquisitions for Alphabet are a tough ask, especially with regulators already looking at Alphabet’s dominance in various markets. We don’t think a major breakup is on the cards, but it’s a risk to keep in mind.
It's hard to know whether the AI revolution will be a tide that lifts all boats or whether certain names will flourish or sink. Alphabet's products look well placed, with dominant positions from which to hopefully grow. The valuation currently looks attractive to us but competition in search and ongoing regulatory scrutiny are 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 LSEG Datastream, 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 not advice or a recommendation to buy, sell or hold any investment.No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.