Alphabet Inc. (Nasdaq: GOOGL) Q1CY22 Earnings Review
| Wisdom Global Investment Managers | ||||
| 3-May-22 | Current Price: $2370 | |||
| Wisdom Global: GOOGL: 1QCY22 result review | ||||
| USD Mn | 1QCY22 | YoY | QoQ | Remarks |
| Revenue | 68,011 | 23.0% | -9.7% | revenue growth in all regions and all products with cloud clocking the highest 44% YoY growth and Youtube lowest at 14%. |
| Gross profit | 38,412 | 23.1% | -9.3% | TAC rate on Google Search & other properties revenues and the TAC rate on Google Network revenues were both substantially consistent YoY |
| EBIT | 20,094 | 22.2% | -8.2% | higher sales and marketing expense growth at 8.6% of revenues vs. 8.2% in the same quarter last year. driven by an increase in compensation expense largely due to a 21% increase in headcount YoY and increase in advertising and promotional activities as the base quarter was affected by the reduction in spending due to COVID-19. The increase in G&A was purely from an increase in headcount. R&D expense growth was due to a 14% increase in headcount YoY. |
| Net profit | 16,702 | 27.7% | -7.8% | lower other income offset partially by lower taxes |
| GM | 56.5% | 10 bps | 30 bps | TAC rates are stable and hence no material changes in GMs. |
| EBIT margin | 29.5% | (20) bps | 40 bps | higher negative EBIT contribution from Other businesses partially offset by slightly less negative EBIT from cloud business |
| NPM | 24.6% | 90 bps | 50 bps | adjusted margins after eliminating other income from both base and current quarter. Lower taxes |
| Major Segments Rev. (USD Mn) | 1QCY22 | YoY (const. cur.) | % of Total | Remarks |
| EMEA | 20,317 | 27.0% | 30.0% | slightly bigger impact from the war in Ukraine than in other regions. |
| APAC | 11,841 | 19.0% | 17.5% | higher growth in the base quarter effect as Q12021 was a comeback quarter. |
| Other Americas | 3,842 | 35.0% | 5.7% | growth in all products. |
| US | 31,733 | 26.8% | 46.9% | growth in all products in the US |
| Major Segments Rev. (USD Mn) | 1QCY22 | YoY | % of Total | Remarks |
| Google Search ads & Other | 39,618 | 24.3% | 58.9% | growth was driven by increases in search queries resulting from growth in user adoption and usage, primarily on mobile devices, growth in advertiser spending, and improvements made in ad formats and delivery |
| Youtube ads | 6,869 | 14.4% | 10.2% | Â growth was driven by brand and direct response advertising products. Growth for brand advertising products was primarily driven by increased spending by advertisers. Growth for direct response advertising products were primarily driven by increased advertiser spending as well as improvements to ad formats and delivery. |
| Google Network (ads) | 8,174 | 20.2% | 12.1% | Â primarily driven by AdSense and AdMob. |
| Google Other | 6,811 | 4.9% | 10.1% | driven by YouTube non-advertising, largely due to an increase in paid subscribers, partially offset by a decline in Google Play revenues largely driven by fee structure changes announced in 2021. Waymo launched its services in San Francisco, the second city after Phoenix to offer Waymo driverless ride-hailing service. Wing launched its on-demand drone deliveries in the Dallas-Fort Worth area. In the first quarter of 2022, Wing completed over fifty thousand commercial deliveries, up more than 3X year-over-year. |
| Google Cloud | 5,821 | 43.8% | 8.7% | Â growth was driven by GCP followed by Google Workspace offerings. Google Cloud’s infrastructure and platform services were the largest drivers of growth within GCP |
| Outlook | ||||
| – We expect a 19% EPS CAGR between CY21-CY23; adjusted for other income. GOOGL’s continuous investments in AI help improve users’ search experience and maintain its lead over rivals in search and other digital products. | ||||
| – CY2021 was one of the first years in which GOOGL displayed massive operating leverage with ebit margins moving from its historic 22-23% to 31%. With massive hiring in Q4CY21, some of this operating leverage will be lost in 2022 but if it is able to maintain these margins going forward it will handily beat our earnings growth projections for the next few years. As of Q1CY22, GOOGL maintained 29.5% EBIT margins even with a seasonal QoQ decline in revenues from Q4CY21. Gives us more confidence that GOOGL will be able to maintain its pandemic era (CY21) EBIT margins of about 30% even in CY22 in spite of the drastic increase in hiring in Q4CY21. As GOOGL increases EBIT contribution from Cloud business due to higher revenues, company level EBIT could improve since without losses from Cloud business company’s EBIT margins would be at 35%. Over the last three years, the company grew revenues at a CAGR of 23% while EBIT grew at a CAGR of 36%. | ||||
| – YouTube is slowly but steadily competing on short videos with high growth YoY, albeit from a low base. YouTube Shorts averaged 30 billion daily views — 4x as much as a year ago. Retail was the largest contributor to ad revenue followed by travel; Q1CY21 travel-related searches exceeded Q1CY19. |
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| – Google’s cloud business is expected to have another robust year in 2022 with corporate capex continuing to rise in the cloud space. However, GCP is a very small and not so material part of the business as of now and hence it could be a long-term positive driver for earnings growth while not contributing much over the next couple of years. As long as it eliminates the negative EBIT contribution, it will help increase company-level EBIT margins. | ||||
| – 20 to 1 stock split effective from mid-2022 is a positive for the stock. Historically stocks that have split have outperformed the market 12 months post-split. Other tech companies with high stock prices may follow suit. The split may also help GOOGL enter the DJIA index which is still a price-weighted index and hence doesn’t consider high (absolute) priced stocks for inclusion in the index. There’s some element of regulatory risk weighing on the stock as the congress tries to reign in the monopolistic power of Google on advertising and search. Finally, the board has approved a $70B stock buyback program which GOOGL may execute over the next year. | ||||
| Valuation | ||||
| – The stock trades at 17x FY23 earnings and 5.3% adjusted CFO (TTM) making it quite attractive for one of the best technology stocks in the industry with a top-tier management team and track record of continuously introducing new apps and services. Google truly adheres to its maxim “organize the world’s information”. | ||||