Alphabet Q2 Earnings: Search and Cloud Growth Remain Impressive

Total
revenue
increased
14%
year
over
year,
roughly
on
par
with
the
prior
quarter.
Google
search
revenue
increased
14%
to
$48.5
billion,
with
retailers
again
the
largest
source
of
growth.
Retail
demand,
especially
among
Asian
firms,
began
to
pick
up
during
the
second
quarter
of
last
year
and
has
yet
to
show
signs
of
slowing.

Alphabet
also
highlighted
the
early
success
of
artificial
intelligence
overviews
within
search
results.
Despite
early
snafus,
management
indicated
that
search
usage
and
satisfaction
have
improved
with
the
inclusion
of
overviews
and
that
ads
have
been
well
received
above
and
below
overview
boxes.
In
short,
we’ve
yet
to
see
strong
evidence
that
new
forms
of
accessing
information,
like
ChatGPT,
are
blunting
search
volumes
or
that
other
query-based
advertising
offerings,
such
as
on
Amazon
(AMZN),
are
increasingly
eating
into
traditional
search
demand.

YouTube
advertising
growth
slowed
sharply
to
13%
from
21%
last
quarter.
Management
pointed
to
a
tough
comparison
versus
the
initial
jump
in
retailer
spending
last
year,
but
the
search
business
faced
a
similar
dynamic
without
the
same
deceleration
this
quarter.

Key
Morningstar
Metrics
for
Alphabet

• Fair
Value
Estimate:
$182.00
• Morningstar
Rating: ★★★
• Economic
Moat:
Wide
• Morningstar
Uncertainty
Rating:
High

Cost
controls,
excluding
the
investment
in
computing
infrastructure,
continue
to
boost
the
operating
margin,
which
expanded
to
32%
from
29%
last
year.
Total
SG&A
expense
declined
3%
year
over
year,
while
both
cost
of
sales
and
R&D
declined
as
a
percentage
of
revenue.
Free
cash
flow
declined
sharply
to
$13
billion
from
$22
billion
last
year,
primarily
due
to
the
timing
of
cash
tax
payments.
Capital
spending,
primarily
investment
in
compute
infrastructure,
increased
to
$13
billion
from
$7
billion
last
year.

Cloud
revenue
increased
29%
versus
a
year
ago
and
8%
sequentially,
surpassing
$10
billion
for
the
first
time.
Cloud
profitability
also
continues
to
improve,
with
the
segment
operating
margin
more
than
doubling
to
11%
from
5%
last
year.

Operating
margin
expansion
will
likely
slow
across
Alphabet’s
businesses
during
the
second
half
of
the
year
as
depreciation
expenses
ramp
up
following
the
surge
in
infrastructure
investment.
However,
the
firm
still
expects
efficiency
gains
across
the
business
to
allow
the
operating
margin
to
expand
in
2024
versus
the
prior
year.

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