Alphabet (GOOG) (GOOGL) reported strong fourth-quarter 2021 results, driven by continuing growth in search advertising, further YouTube monetization thanks to the strengthening of its network effect moat source, and acceleration of Google cloud growth. Strong revenue also created operating leverage, widening margins more than expected. While we expect slower revenue growth this year, we project double-digit growth in YouTube and cloud to continue. We have modeled lower margins in 2022 given Alphabet’s continuing aggressive investment in its cloud offerings. We foresee a return of margin expansion in 2023 due to the steady increase in Google’s cloud recurring revenue. We have not made significant changes to our model, and after considering the time value of money, we have increased our fair value estimate 4% to $3,600. In addition, Alphabet announced that it plans to do a 20-for-1 stock split on July 15, 2022.
Total revenue for the quarter came in at $75.3 billion, up 32% from a year ago, driven by a 31% and 45% increase in Google services and Google cloud revenue, respectively. On the services front, continuing increases in brand advertising and marketing spending by retailers, with further improvement in travel and hospitality ad spending pushed search revenue up 36%. Total advertising revenue (including YouTube, up more than 25%) grew nearly 33% from last year. Google’s other revenue which includes hardware such as the Pixel, along with Google play and YouTube’s subscription revenue, increased 22%. Cloud segment revenue increased 45% from last year and the backlog increased 70% to $51 billion. Fourth-quarter total operating income of $21.9 billion represented a 29% operating margin, a 150 basis point improvement from last year, mainly due to Google services margin expansion which was driven by strong search and YouTube top line growth.
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