Alphabet (Google) Stock Missed Street Expectations In Q2, What’s Next?

Alphabet’s stock (Google) (NASDAQ
NDAQ
:GOOG) is down about 18% year-to-date compared to the 13% decline in the S&P500 over the same period. That said, at its current price of $118, the stock is trading 20% ​​below its fair value of $148 – Trefis’ estimate for Google’s rating. Notably, the company completed a 20-for-one stock split in the form of a special one-time stock dividend in mid-July, making its shares much more affordable for the retail investor.

The global tech giant posted weak results in the second quarter of 2022, with profits and revenue missing street estimates. It reported total revenue of $69.68 billion, up 13% year-on-year, driven by a 12% increase in Google
GOOG
advertising (including Google Search, YouTube Ads and Google Network) and a 36% jump in Google Cloud Segments. Notably, three out of four advertising segment key metrics showed year-over-year growth – paid clicks (up 12% YoY), impressions (+6%), and cost per impression (+ 2%). On the other hand, the operating margin decreased by three percentage points to 28%, due to higher cost of revenues and an increase in operating expenses. Additionally, other income (expense), which reflects gains and losses on marketable and non-marketable equity securities, decreased from $2.6 billion to -$439 million. Overall, this resulted in a 14% decline in net income to $16 billion.

Advertising

The company’s revenue grew 41% year-on-year to $257.6 billion in fiscal 2021. It was primarily driven by a 43% growth in Google advertising revenue, followed by of a 47% increase in Google’s cloud business. However, the growth rate slowed in the first two quarters of 2022. Markedly, six-month revenue improved 17% year-on-year to $137.7 billion. In total, net income for the first six months of 2022 decreased 11% year-on-year to $32.4 billion due to an unfavorable decline in other income (expenses).

To advance Google revenue is expected to reach $287.7 billion in fiscal 2022. In addition, its net profit margin is expected to decline from 29.5% to around 24% during the year, resulting in a net profit of $69.3 billion. This, coupled with an annual EPS of $5.28 and a P/E multiple of 28x, will lead to a valuation of $148.

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