Despite falling 13% over the past six months, shares of Google parent Alphabet (GOOG, GOOGL) have been a relative out-performer when compared to its FAANG peers Meta Platforms (FB), Amazon (AMZN) and Netflix (NFLX) which have suffered respective declines of 43%, 15% and 67% during that span. But can that outperformance continue?
Alphabet is due to report first quarter fiscal 2022 earrings results after the closing bell Tuesday. Amid the rout in tech, the market has adopted a “flight to quality” approach. This means investors are picking their spots, looking for companies that feature fundamental qualities such as sustainable revenue and earnings growth, solid cash flows and strong balance sheets. Alphabet features all of these qualities. The question is whether it can overcome an economic slowdown?
Online advertising has seen a drastic slowdown amid various macroeconomic concerns such as rising inflation. According to analyst Rohit Kulkarni at MKM Partners, there’s an expected slowdown in ad spending, particularly in the first half of the year. Kulkarni expects the decline in U.S. spending could lead to growth of only 9% to 11% due to tough year-over-year comparisons. As such, he’s trimming his Q1 estimates for Google which relies on advertising for a great portion of their revenues. Kulkarni cites four incremental macro headwinds, including “soft brand ad spend, particularly around geopolitical content.”
The direct impact of the Russia/Ukraine war, which he believes will “likely impact from soft consumer spend in Europe, driven by inflation and higher oil prices.” That said, when factoring the recent momentum of Google Cloud Platform and Google Workspace, the company has shown considerable more growth than it has received credit for. Estimate calls for Google Cloud to deliver Q1 segment revenues of $5.8 billion, implying year-over-year growth of 47%. Can Google’s cloud business be an offsetting factor for the slowing ad business and make up the difference?
For the quarter that ended March, Wall Street is looking for the Mountain View, Calif.-based tech giant earn $27.40 per share on revenue of $72.09 billion. This compares to the year-ago quarter when earnings came to $22.30 per share on revenue of $56.90 billion. For the full year, ending in December, earnings are expected to rise 4.3% year over year to $117.10 per share, while full-year revenue of the $303.25 billion would rise 17.7% year over year.
The strong year-over-year projections for both revenue and profits underscore how strong the company’s three operating segments have been. While Google Services remains the company’s bread-and-butter business, accounting for some 90% of consolidated revenues in 2021, Google Cloud is starting to show strong acceleration. Alphabet’s cloud revenue rose 47% year over year in 2021. While Amazon Web Services (30% market share) and Microsoft’s (MSFT) Azure (20% market share) are the two leading cloud providers, Google Cloud is gaining ground with 9% share.
What’s more, the global cloud market is expected to grow at an annual compounded rate of 16.3% in the next four years. This means, the global cloud market could reach $950 billion by 20216. Notably, Alphabet’s cloud revenue is growing even faster than the the global projected rate. And that’s likely to help drive earnings beats as it did in the fourth quarter when its reported earnings of $30.69 per share, on revenue of $75.33 billion, smashing the Street estimates of $27.24 per share, on $71.83 billion in revenue.
The revenue gains were driven Google advertising, which includes search, YouTube ads and Google network ads, totaling $61.2 billion, up 32% year over year. On Tuesday, beyond a top and bottom line beat, the market will want to see sustained improvement in the cloud segment to drive Google stock higher.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.