Alphabet Inc. (NASDAQ:GOOGL) (Google) issued a disappointing third-quarter report Tuesday. The company’s results were harmed by advertisers’ reduced advertising budgets and the strengthening of the US dollar. Investors are concerned about the deterioration of financial indicators in the context of tightening monetary policy. The advertising market is far from perfect, and there are few prospects for growth in the near future. As a result, Google stock dropped (-9%).
Nonetheless, Google may emerge from the current crisis stronger than before as a business, so I intend to begin building a position in Google stock in the near future. Let’s look at the report to see why Google stock is so appealing at the current price.
Google’s revenue growth slowed to a single-digit rate, largely due to the US dollar’s strengthening. Revenue for the quarter was $69 billion, 6% higher than last year but 2% lower than the consensus estimate. Revenue growth was 11%, excluding the impact of the strengthening dollar (51% of revenue comes from regions other than the United States).
Marginality EBITDA (GAAP) was $21.1 billion, down -13% year on year and 9% below expectations. The current EBITDA margin stands at 31%, down from 37% a year ago. The cost of sales increased by 13%, primarily due to an increase in data center and server purchase expenses. The cost of doing business increased by 26%. The increase was due to a rise in R&D and G&A staff, as well as a rise in advertising and promotion expenses in S&M. Overall, the company’s workforce increased by 24% year on year (+12.7 thousand employees). The FCF margin was 23%, which was lower than the previous year’s margin of 29%. Because hiring is expected to slow significantly in Q4 (up to 50% of Q3 levels), I do not expect further significant deterioration in margins.
Google Search revenue was $39.5 billion, up 4% year on year but down 4% from expectations. Google Network segment revenue was $7.8 billion (-2% year on year and 5% lower than expected). Travel and retail companies saw the most growth among advertisers. The financial sector saw the greatest reduction in advertising budgets (insurance, lending, mortgage, and cryptocurrency).
YouTube’s performance has been impacted by the overall decline in the advertising market. The service’s advertising revenue was $7 billion (-2% year on year and 5% lower than expected). Shorts continued to be the primary driver of user engagement. However, because the company only began monetizing this service in September, the increase in engagement has not yet affected the growth of advertising revenue.
I anticipate that the monetization of Shorts will begin to have a positive impact on Google’s segment results in the first quarter of 2023. Another driver will be the distribution of a portion of advertising revenue to content creators, which has already been implemented in other YouTube services. Furthermore, I’d like to point out that YouTube’s overall user engagement is increasing. In September, YouTube’s share of total TV usage reached an all-time high of 8%.
Google Cloud Platform
The report’s main highlight was the results of the Google Cloud segment, which continues to grow rapidly. Revenue in the segment was $6.8 billion, up 38% year on year and 3% higher than expected. Google Cloud’s services are already used by more than 8 million businesses worldwide, according to management. Given many companies’ emphasis on cost reduction, I believe that the high demand for cloud infrastructure will continue. I also notice an improvement in the segment’s marginality. The segment’s operating margin was (-10%), which is the best indicator of the segment. In the previous quarter, the margin was (-14%), and a year ago, it was (-13%).
Final Thoughts About Google Stock
Despite the negative reporting and the continued shrinkage of the advertising market, I believe the current price of Google stock is already profitable enough to begin forming a position. Of course, there may still be pressure on Google stock in the coming days, but the shares appear appealing as a long-term investment. All of the company’s problems are, for the most part, of a temporary nature. In the context of the continued decline of the advertising market, I believe Google has the most stable business model among the companies focused on the advertising market.
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