PhillipCapital analyst Jonathan Woo has kept his “buy” rating on Alphabet Inc. with an unchanged target price of US$3,493 ($4.844) despite its earnings miss.
Alphabet Inc. is an American multinational technology conglomerate holding company headquartered in Mountain View, California, and the parent company of Google and several former Google subsidiaries.
The company’s PATMI for the 1QFY2022 ended March fell 8.3% y-o-y to US$16.4 billion, which stood at 18% of Woo’s full-year forecasts. The missed estimates were attributable to an unrealized US$1.2 billion loss of equity investments. Google posted an earnings per share (EPS) of US$24.62, missing consensus estimates of US$25.91.
On the other hand, Alphabet’s revenue for the 1QFY2022 increased by 23.0% y-o-y to US$68.0 million, meeting Woo’s forecasts at 22% of his full-year estimates. This is in spite of the estimated 1% loss in revenue due to a cessation of its ad services in Russia. The y-o-y growth in the quarter’s revenue continued to be supported by strength in Google’s services and cloud segments.
In addition, growth drivers are still performing well, with Cloud remaining as Google’s fastest growing segment, with 44% y-o-y growth in the quarter, supported by a continued demand in both cloud cybersecurity, and cloud productivity applications.
“Google Cloud continues to grow well, and we expect this high growth of 40% up y-o-y to continue moving forward, especially as companies continue to rely heavily on cybersecurity, infrastructure, and platform services that Google Cloud provides,” says the analyst.
Google also continued to see growth in total time spent on YouTube, with over 30 billion daily views on YouTube Shorts, more than 4x compared to a year ago.
Although monetisation of YouTube Shorts is still in its infancy, Woo believes that it should provide an additional boost to overall advertising revenue once fully monetized.
“We think that continued consumer preference for short-form videos should provide constant tailwinds for viewership metrics in this product,” says Woo.
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The quarter’s net margin fell eight percentage points y-o-y to 24%, largely due to an unrealized loss of US$1.2bn in equity investments for 1QFY2022 as compared to an unrealized gain of US$4.8 billion in 1QFY2021.
PATMI without other income came up to US$17.6 billion in 1QFY2022 as compared to US$13.1 billion in 1QFY2021, a 34% y-o-y increase.
Operating income grew in line with revenue, with operating margins roughly the same at 30%.
“We expect slowing growth of around 18%-20% y-o-y for 2Q22, slightly below 23% growth shown in 1QFY2022,” says Woo. This is mainly due to 2QFY2021 seeing 60% y-o-y growth over a very weak 2Q20 that was in the middle of the Covid-19 pandemic, and provides a particularly tough y-o-y comparison for 2QFY2022, and for the rest of FY2022 as well.
Looking ahead, the analyst foresees headwinds from suspending most of the company’s commercial activities in Russia during the latter part of 1QFY2022 to continue to be present.
He also estimates slowing growth of around 18% to 20% y-o-y for the 2QFY2022, slightly below the 23% growth seen this quarter.
“A key reason for this is because 2QFY2021 saw 60% YoY growth over a very weak 2QFY2020 that was in the middle of the Covid-19 pandemic, and provides a particularly tough y-o-y comparison for 2QFY2022, and for the rest of FY2022 as well,” he writes.
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In addition, the analyst expects the growth of over 40% y-o-y seen in Google Cloud continuing to grow well. The high growth is expected to continue moving forward, especially as companies continue to rely heavily on cybersecurity, infrastructure, and platform services that Google Cloud provides.
“The increasing popularity of YouTube Shorts can potentially be a source of additional revenue with effective monetization. We think that continued consumer preference for short-form videos should provide constant tailwinds for viewership metrics in this product,” he adds.
Shares in Alphabet closed at US$2,287.90 at US$37.68 up or 1.67% higher on May 11.
