The last several weeks have been a mixed bag as companies, namely big tech, reported earnings. In 2021, Alphabet (GOOG 0.08%) (GOOGL 0.01%) posted impressive results quarter after quarter. Whether it was driven by the astonishing growth in its video platform, YouTube, or the pace at which its cloud computing segment is catching up to incumbents Microsoft and Amazon, investors applauded Alphabet's stock as it rocketed nearly 70% in 2021 compared to the 27% return in the S&P 500.
Throughout 2022, investors have witnessed a precipitous sell-off of equities, particularly in technology companies. For reference, the Nasdaq Composite index is down over 25% year to date. Although Alphabet's first-quarter 2022 earnings illustrated some plateauing growth areas, management hinted at several catalysts that could be strong tailwinds for the company in the long run. Let's unpack the company's earnings and analyze the overall health of the business and the subsequent investor sentiment following the report.
Image source: Getty Images.
Social media growth is slowing
Broadly speaking, the lockdowns from COVID-19 led to a surge in content creation and consumption. Unsurprisingly, Alphabet-owned video-sharing website YouTube experienced accelerated consumer demand, which resulted in more pronounced advertising revenue growth. However, streaming sites like Netflix and YouTube are beginning to show signs of waning growth, potentially suggesting a slowdown for the respective businesses.
It would be shortsighted to say that streaming demand may be slowing due to a combination of increased vaccination rates, pent-up demand for travel, and reopening efforts nationwide. Although there is merit to that argument, during Alphabet's latest earnings call, investors learned that YouTube faces fierce competition, namely from short-form video app TikTok.
On the surface, it may be alarming that consumers are flocking to a new source of entertainment. However, a contrarian might argue that the competitive threat Alphabet faces has forced the company to reignite its product roadmap and develop innovative features. During the earnings conference call, Alphabet CEO Sundar Pichai explained that YouTube's answer to TikTok, called Shorts, averages over 30 billion views per day -- four times more than a year ago.
These statistics are encouraging because they imply that more users are adopting YouTube's new functionality. The second component of this strategy is analyzing whether Alphabet can monetize these new products. It is also important for investors to understand there is more to YouTube than advertising. For the quarter ended March 31, 2022, Alphabet reported growth in YouTube non-advertising revenues, driven by subscription growth in YouTube Music and YouTube TV.
Though YouTube faces some near-term challenges from other social media applications, Alphabet's management thoroughly illustrated that this segment is in very good shape overall, and the initial results from new features should encourage investors.
The cloud could be a hidden gem
One highlight of Alphabet's Q1 results was its growth in Google Cloud. For the quarter ended March 31, 2022, Alphabet reported revenues of $5.8 billion, up 44% year over year in its cloud segment. Management explained that the robust growth was driven by increases in both product suites under the cloud umbrella. More specifically, strong demand for cloud infrastructure and platform services such as Google Workspace resulted in more purchased seats and higher average revenue per seat.
Alphabet is showing investors that the company is doubling down on the cloud, with aggressive hiring. Alphabet's chief financial officer, Ruth Porat, explained that of the 7,400 people hired during the first quarter, technical and sales roles for Google Cloud had the biggest increases. Moreover, Alphabet is in the early stages of rolling out new services in the cloud, primarily in cybersecurity.
So far in 2022, Alphabet has already acquired two players in the cybersecurity arena. As the company works to integrate these new businesses, Alphabet could very well be on its way to establishing an end-to-end cloud suite as it ramps up against the competition.
Keep an eye on valuation
Over the last month, Alphabet stock is down roughly 10% and trading at 5.7 times trailing-12-month sales, which is its lowest multiple in over a year. The company ended Q1 with roughly $134 billion of cash and cash equivalents. Additionally, investors learned that Alphabet's Board authorized a $70 billion stock buyback.
As stated during its Q4 2021 results earlier this year, Alphabet plans to split its stock later this summer. With the stock trading lower despite several encouraging catalysts and a healthy balance sheet, now is an opportune time to dollar-cost-average into the stock.
