Initiating Coverage Of Alphabet (GOOGL)
We finally get around to talking about Google. Read on!
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Summary
Headline growth is accelerating, with momentum in Google Cloud.
Greater operational efficiency boosts EBITDA and free cash flow margins.
Technical analysis shows short-term headwinds for the stock price, but longer-term promise.
What does Alphabet do?
Alphabet is a collection of businesses. The Alphabet’s largest and most famous brand is, of course, Google. Alphabet reports Google in two segments, Google Services and Google Cloud. Alphabet reports all non-Google businesses collectively as Other Bets.
Between the three segments, Google Services is undoubtedly the king, producing 89% of the total revenue. They include products that every consumer would have used at some point, encompassing Google Search, YouTube, Google Ad Network, Android, Chrome, Hardware (e.g. phone and home devices), Maps, and Google Play. Google Cloud is more geared toward business services, such as Cloud and Workspace. Meanwhile, Other Bets are moon-shot plays, most of which don't make any money.
GOOG vs GOOGL
GOOG and GOOGL are both stock ticker symbols for Alphabet. The main difference between the two is that GOOG shares have no voting rights, while GOOGL shares do. In terms of financial performance, GOOG and GOOGL shares are essentially the same. They both represent an equal ownership stake in Alphabet Inc. and they both trade at the same price. However, GOOGL shares may trade at a slight premium to GOOG shares because they have voting rights.
For the purpose of our stock analysis, we will reference GOOGL.
A solid Q2 performance
Alphabet’s headline revenue expanded by 7% in Q2 from the previous quarter, compared with an 8% contraction in Q1. This revenue growth also marked a 7% year-on-year (YoY) increase, accelerating from the 3% YoY increase in Q1.
Google Cloud is growing fast
Google Cloud is growing at 28% YoY – that’s a growth stock if a standalone business. Alphabet boasts 70% of generative AI unicorns as Google Cloud customers. In contrast, Google Services (mostly advertising revenue) is turning over just 5% growth.
AI everywhere
If I received $1 every time the management mentioned “AI” in the Q2 Earnings Call, I would be a very rich man.
In terms of AI, Alphabet has been working on: