- Alphabet provided moderately negative 4Q financial results.
- Google Search Segment: Slowing down amid shrinking ad budgets.
- YouTube: Growing engagement with a temporary decrease in monetization.
- In terms of the ratio of the EV / EBITDA multiple to the sum of revenue growth with the FCF margin, Alphabet’s multiples look better than peer multiples.
- As a result of reporting, I keep my bullish view on Alphabet’s share.
As part of my preview of Alphabet’s (NASDAQ:GOOG) (NASDAQ:GOOGL) 4Q earnings, I noted that I expect a generally neutral quarterly report. In fact, that is what happened. A 3% fall in stocks after the publication of financial statements partly offset the growth of shares along with the entire market on the eve of the 4Q reporting. Before reading this article, I recommend that you familiarize yourself with my preview of the reporting. In this article, I’ll go over GOOGL’s 4Q results and then look at the company’s multiples in comparison with its peers. Looking ahead, I keep my positive view on GOOGL’s shares, even despite the slowdown in the global advertising market.
Overview of the 4Q 2022 results
GOOGL’s total revenue was at $76 billion (+1% YoY, +10% QoQ), 1% worse than consensus. Excluding the F/X impact, the revenue growth was 7% YoY. Operating income fell 17% YoY to $18.1 billion (+6% QoQ, margin 24%), 4% worse than consensus. Free cash flow totaled at $16.3 billion (-12% YoY, +2% QoQ). The FCF margin was at 21%, a year earlier it was at 25%, and a quarter earlier it was at 23%. Earnings per share amounted to $1.05 (-31% YoY, -1% QoQ), 12% worse than the consensus expected. The company ended the year with a cash position of $114 billion (8% of market capitalization).
The Google search segment revenue amounted to $42.6 billion (-2% YoY, +8% QoQ), which is 2% worse than expected. The YoY fall was due to the F/X impact and budget cuts by advertisers. Among advertisers, the greatest demand was from advertisers from such industries as tourism and retail. Deterioration in advertising demand was observed on the part of companies from the financial sector.
YouTube ad revenue fell 8% YoY to $7.9 billion (+13% QoQ), 4% worse than the consensus expected. The revenue decrease was due to a reduction in the advertising budgets of some advertisers, as well as due to weak monetization of Shorts. At the same time, the decrease in the monetization of Shorts was not due to the decrease in engagement, but to the fact that the monetization of this service is just beginning to develop. Thus, daily views of YouTube Shorts grew to 50 billion per day, while in 1Q2022 this figure was at the level of 30 billion per day.
The Google Cloud segment remains GOOGL’s main growth segment. Cloud revenue totaled $7.3 billion (+32% YoY, +7% QoQ), 1% better than the consensus expected. Operating loss was at the level of $480 million (margin (-7%)). A year earlier, the margin was at the level of (-16%), and a quarter earlier it was at the level of (-10)%.
Comparative valuation of the company
Having briefly reviewed the company’s reporting, let’s compare Alphabet’s multiples with the peer multiples, especially since all the major technology companies have already published the 4Q results. For comparison, I use the EV/EBITDA multiple, since the P/E multiple is not suitable, as Amazon doesn’t have stable net profit. The average forward EV/EBITDA multiple of big techs in my sample is 15.6x. Alphabet (10.8x), Amazon (13.3x), and Meta (8.7x)’s multiples are below average. Microsoft and Apple have 19x EV/EBITDA multiple, and Netflix – 23x.
Now let’s compare the fundamentals of these companies. To save time, let’s focus on the two most important indicators – the expected consensus revenue growth rate and free cash flow margin. In terms of the revenue growth, the indicators are more or less similar between companies. Average forward revenue growth (one-year forward) is 8.3% in my sample. Alphabet (9.5%), Microsoft (11.6%), Amazon (10.4%) have this figure above average. Apple (4.6%), Netflix (8.9%), and Meta (5%) have below average figures. The three-year projected revenue CAGR for all companies except Apple is roughly the same, at 10%. Apple has it at 4%. The average free cash flow margin for this sample of companies is 16%. Alphabet has a FCF margin of 21%, while Microsoft and Apple have FCF margin of 29% and 25%, respectively. Netflix’s FCF margin is 5%, while Meta’s is 16%. Amazon has a negative FCF margin (-5%). Thus, in terms of the ratio of the EV / EBITDA multiple to the sum of revenue growth with the FCF margin, Alphabet’s shares look better than peers. Of course, the possibility cannot be ruled out that it is not Alphabet is undervalued, but that other companies are overvalued, especially Netflix. Nevertheless, the conclusion on the relative analysis coincides with my conclusion on the analysis of reporting.
Despite the impact of the slowdown in the global advertising market, GOOGL’s performance is relatively stable. I think that technological leadership in many segments and a focus on the development of artificial intelligence will help the company maintain its leadership position. I also suggest that the current increase in user engagement as the advertising market recovers will have a positive impact on the growth of the company’s shares. Also, the undervaluation of Google in comparison with peers makes Alphabet a more attractive investment opportunity. As a result of 4Q reporting, I maintain my positive view on the company shares. Given the rapid growth of the stock market since the beginning of the year, it is not worth expecting a quick growth in Google’s shares. However, accumulating a position gradually is quite appropriate.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in GOOGL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is not investment advice. I am not an investment adviser. Before making any investment, please do your own research!