Alphabet Inc (GOOG) NPV C

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Alphabet reported a 16% rise in third-quarter revenue to $88.3bn, ignoring the effect of exchange rates. The core advertising business, which includes Google search and YouTube, saw revenue rise 10% to $65.9bn. Google Cloud revenue was up 35% to $11.4bn.

Operating profit was up 34% to $28.5bn, reflecting higher revenue and strong cost control. Margins rose 4 percentage points to 32%.

Free cash flow generated was $17.6bn, while Alphabet had net cash of $80.1bn as of the end of June, down from $97.7bn at the start of the year.

Alphabet announced a cash dividend of $0.20 per share.

The shares rose 5.5% 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?

Strong third-quarter results should help ease some investor fears, and we think there are signs that the answer to both of those key questions can be yes.

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 strength of Google search in recent quarters is a sign that AI may already be delivering incremental improvements. This was the first full quarter where AI overviews were in play in the US for the entire period, 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. 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. The expected hit to margins hasn’t come yet, with impressive efficiency improvements doing their job but is still an area to watch.

The balance sheet is a source of major strength, with close to $80bn 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 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.

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.

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.

Previous Alphabet Inc updates