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Stock Analyst Update

Alphabet Misses Q2 Earnings Expectations, But Cloud Growth Impressive and Advertising Intact

Lowering Alphabet stock’s fair value estimate to $169 from $180 amid ongoing economic and geopolitical challenges.

While Alphabet’s (GOOG) second-quarter results missed FactSet consensus estimates, we found the firm’s search advertising and cloud numbers encouraging. Google’s diversified advertising offerings appear to be partially offsetting uncertainties in the macro environment, while digital transformation to cloud remains on top of many businesses’ priority list. We have slightly lowered our short- and medium-term expectations given the ongoing economic and geopolitical challenges, resulting in a $169 fair value estimate for Alphabet, down from $180. While the firm is taking steps to control costs at least through this year, with a strong cash-generating advertising business, progress toward profitability within its cloud segment, and a strong balance sheet, we think Alphabet is well-positioned to allocate more capital toward tuck-in acquisitions and investments.

Alphabet generated total revenue of $69.7 billion during the quarter, up 12.6% year over year, including the negative 3.7% impact of the stronger U.S. dollar. While the firm claims some advertisers have been reducing spending, Google’s advertising revenue still grew 11.6% from last year with search and YouTube advertising revenue of $40.7 billion (up 13.5%) and $7.3 billion (up 4.8%), respectively. The firm’s other services revenue declined 1% from last year. Google cloud revenue increased 35.6% from last year to $6.3 billion. Google services’ 36.2% operating margin combined with operating losses in other segments, resulted in total operating margin of 27.9% compared with 31.3% last year.