Alphabet (GOOGL 0.14%) (GOOG 0.07%) recently reported its 2023 first quarter (ended March 31) financial results. Revenue of $69.8 billion and diluted earnings per share of $1.17 exceeded what Wall Street analysts expected, exciting investors and pushing shares up 4% immediately following the positive news. In 2023, the stock price is up 17% but is still down 31% from its all-time high.
The headline numbers are certainly important, as they can have an immediate impact on the stock. But there's so much more information that goes into gaining a better understanding of this dominant tech company. With that being said, here are three important things the smartest investors know about Alphabet right now.
1. The digital ad market is under pressure
Alphabet's top-line figure rose just 2.6% compared to the first quarter of 2022, which continues a meaningful growth slowdown. In fact, this was the third consecutive quarter that revenue increased by single digits, a far cry from the greater-than-20% gains the business posted throughout 2021. It's also worth pointing out that YouTube, an otherwise dominant video-entertainment platform, posted ad sales of $6.7 billion last quarter, representing a year-over-year decline of 2.6%.
Macroeconomic headwinds deserve much of the blame, as many businesses out there are reporting decelerating gains, as well. In Alphabet's case, what's happening in the digital advertising market is of the utmost importance. That's because 78% of the company's revenue last quarter was derived from ads. In the latest three-month period, Alphabet generated $54.5 billion from digital ads, a slight year-over-year drop. This was the second straight quarter that ad sales were down.
"In terms of the operating environment, our results in the first quarter reflected ongoing headwinds due to a challenging economic environment and the outlook remains uncertain," CFO Ruth Porat highlighted on the earnings call.
It should ease shareholder worries somewhat that other businesses in the space, like Meta Platforms and Snap, experienced the same headwinds as Alphabet -- namely, the softer ad market. These companies also initiated significant layoffs to help manage the current reality.
2. Google Cloud finally turns a profit
Amazon Web Services and Microsoft Azure are the two leading cloud service providers. But Google Cloud Platform (GCP) is a booming third-place competitor. GCP increased revenue 28% in Q1 to $7.5 billion. And for the first time, this segment posted a positive operating profit, totaling $191 million last quarter.
However, this was largely due to Alphabet reallocating costs across the organization. Even before this change, GCP's operating loss declined in every single quarter throughout 2021, so this segment was already heading in the right direction as its sales soared.
Management is seeing customers focus on cost optimization when it comes to cloud spending. Consequently, the near term remains uncertain. But GCP's growth was a bit better than Azure's 27% jump in its latest fiscal quarter. The continued momentum is impressive, and the market opportunity is huge.
"Nearly 60% of the world's 1,000 largest companies are Google Cloud customers, and many leading start-ups and millions of small and medium enterprises use Google Cloud," CEO Sundar Pichai said on the call. GCP will only become a more important part of the company.
3. Alphabet is returning capital to shareholders
Although Alphabet's first-quarter net income of $15.1 billion was an 8.4% year-over-year decline, it's still a very profitable enterprise. Over the trailing-12-month period, the business posted a gross margin of 55.3% and an operating margin of 25.4%. Alphabet also generates tens of billions of dollars in free cash flow year in and year out. This favorable situation allowed management to approve an additional $70 billion of share repurchases.
Over the past five years, from the end of the first quarter of 2018 to March 31 this year, Alphabet has reduced its outstanding share count by roughly 9%, allocating hundreds of billions of dollars to this share buyback. This boosts earnings per share for existing shareholders, which can support a higher stock price. And it's an indication that the leadership team believes the stock is a good value.
There's no doubt that Alphabet is going through a difficult stretch, like every other business. But this is still a wonderful company and a stock to own for the long term.
