Alphabet (NASDAQ: GOOGL) reported earnings for its Q1 2022 results yesterday evening. Since then, Alphabet shares have taken a tumble as earnings missed analysts’ expectations. They’re still up a few percent over 12 months though. However, amid the latest sell-off, here’s why I’ll be buying more shares of Alphabet.
(Y) is everyone overreacting?
Although revenue came in at $68bn, matching the 23% growth estimates, earnings per share (EPS) underperformed. Analysts had been expecting EPS of $25.60, but were disappointed when the headline number came in a dollar lower.
Aside from that though, everything else in the earnings report was actually rather decent. Google’s biggest revenue driver in Search grew by 24% as it benefited from an uptick in retail and travel-related searches. Additionally, Alphabet managed to retain its stellar operating margins of 30%, undeterred by inflationary pressures.
So, if revenue grew and operating margins remained steady, where did all the earnings go? Well, the answer lies in the conglomerate’s cash flow statement. CFO Ruth Porat disclosed that the company spent £9.8bn on long-term investments such as property, technology, equipment, servers, and talent. This is the most the S&P 500 company has ever spent on Capex, showing that Alphabet has used this quarter to innovate its offerings.
Hey, Google. What’s the weather like today?
Cloudy, with a chance of sunshine — that’s my key takeaway from Google Cloud’s performance. Despite Cloud revenue growing 44% year on year at $5.8bn, there was a slowdown in growth from the last quarter as losses widened. Google Cloud is a business that Alphabet views to be potentially as lucrative as Search, hence why it’s heavily investing in it. Management continues to aggressively invest in its Cloud segment through global infrastructure, cybersecurity, and data analytics. I’m expecting this move to bring in more customers over time, as demand for safe and efficient cloud computing increases.
Guidance was also fairly positive. Tailwinds from hybrid working habits continued to push Google Services higher as revenue for the segment came in at $61.4bn. While YouTube’s growth took a hit, its short-form offering secured 30bn daily views in Q1. This was four times higher than in the previous year. In fact, time spent on YouTube continued to grow, shrugging off worries about TikTok taking users away.
Given that Russia only accounts for 1% of revenues, sanctions shouldn’t affect the firm’s earnings too drastically. Nevertheless, it’s worth noting that European advertisers pulled back on advertising in March due to the conflict.
Alphabet That
Alphabet has an excellent record in generating healthy returns on capital employed (26.7%). With that in mind, an EPS miss is not my biggest concern. Especially when earnings was spent on investments to secure bigger returns in the future. Pair that with a $70bn share buyback programme (5% of its publicly available shares), and this is yet another masterclass of capital allocation from Ruth Porat.
With a free cash flow of $15.3bn and a debt-to-equity ratio of 5.8%, Alphabet is in an extremely healthy position to bring shareholders value for the long-term future. I’m confident that it’s only a matter of time before the tech giant bounces back. As such, I’m buying more shares for my portfolio.