Where next for Alphabet stock as growth grinds to slowest pace on record?

Alphabet delivers slowest sales growth on record

Revenue rose just 1% from last year to $76.0 billion in the fourth quarter. That was slower than the 1.8% rise pencilled-in by analysts and marked the slowest quarterly revenue growth on record as softer demand in the digital advertising and cloud computing markets bite.

Notably, the strong US dollar provided a significant headwind considering the amount of money Alphabet makes abroad. It performed much better when this is stripped out considering sales would have risen 7% at constant currency.

Google Search, which accounts for over half of its total revenue, saw sales decline 1.6% in the quarter and that was much deeper than the 0.1% drop forecast. YouTube also underperformed after sales fell 7.8%, sharper than the 4.2% fall expected by analysts. Businesses are cutting budgets and spending less on marketing given the uncertain economic outlook and rising costs.

That was countered by a 32% rise in revenue from Google Cloud. Although that beat expectations, it was the eighth consecutive quarter of slower growth. That echoes the slowdown we have seen at larger, more profitable rivals Amazon and Microsoft.

Alphabet earnings plunge more than anticipated

Alphabet’s EPS plunged 31% to $1.05 in the fourth quarter, which was far short of the $1.21 forecast by Wall Street. Margins continued to be squeezed and hit their lowest level in two-and-a-half-years in the period, resulting in a third consecutive quarter of lower profits.

Operating profit from its core advertising business fell 19% as prices fall and costs increase. Plus, while Google Cloud is propping-up the topline, it is still deep in the red and dragging down the bottom line. Markets don’t expect this to change anytime soon either considering Wall Street forecasts Google Cloud won’t churn out its first operating profit until 2025.

Alphabet’s ad business could remain under pressure

With the economy slowing down and a possible recession around the corner, the core advertising business could continue to struggle over the short-term. Ad dollars are set to fall again in the first quarter, but markets think they will start to grow again in the second quarter and approach double-digit rates by the end of 2023. Meanwhile, growth will continue to slow at Google Cloud to below 25% this year.

The result, as far as Wall Street is concerned, is that Alphabet will report 7.2% revenue growth and a 14.8% rise in EPS in 2023, but that is underpinned by a strong recovery in the second half. That means estimates could be geared toward the downside during the first.

Alphabet’s vow to cut costs fails to impress

In response to tougher conditions, Alphabet is focused on cutting costs. Alphabet has announced plans to lay off 12,000 workers, representing over 6% of its workforce. Most of the $1.9 billion to $2.3 billion of restructuring charges will be booked in the first quarter of 2023. Still, that is quite shallow considering Alphabet’s workforce has doubled in size since the start of the pandemic and more cost-cutting efforts are on the way. Alphabet has said it will ‘meaningfully’ slow the pace of hiring this year.

‘We’re on an important journey to re-engineer our cost structure in a durable way and to build financially sustainable, vibrant, growing businesses across Alphabet,’ said CEO Sundar Pichai. ‘We have significant work underway to improve all aspects of our cost structure, in support of our investments in our highest growth priorities to deliver long-term, profitable growth.’

Rival Meta was rewarded and regained the confidence of the markets this week when it cut spending and capital expenditure budgets, with Mark Zuckerberg naming 2023 as the ‘Year of Efficiency’. However, the lack of specifics from Alphabet seems to have left investors unconvinced. Plus, Meta was offering a significantly lower valuation than Alphabet, which gave it more room to bounce back when it reported results this week.

Can Alphabet provide new catalysts in AI?

The company did reiterate that it is utilising artificial intelligence to improve its Search and Cloud services while simultaneously improving the monetisation of YouTube Shorts. Pressure is building on Alphabet to unleash new AI tech that it has been working on for years following the initial success of AI-driven chatbot ChatGPT, which is being backed by Big Tech rival Microsoft and unnerving investors that Google search could be leapfrogged as the next wave of technology emerges.

Pichai said Google will unveil its LaMDA chatbot software and make it publicly available in the coming weeks, which could prove a big test that will see markets how it stacks up against ChatGPT. It plans to start breaking-out the result of its AI projects from the first quarter of 2023.

This comes at a time when its core search and advertising business is not only facing slower growth but greater regulatory pressure. The US Justice Department has said there are calls for Alphabet’s ad-technology business to be broken up because of its monopoly over the digital advertising market.

Where next for GOOGL stock?

Investors were clearly optimistic ahead of Alphabet’s results considering shares popped over 7% yesterday to hit their highest level in over four months. However, that rally pushed the RSI into overbought territory and the disappointing update has snapped the rally, with the stock down 4.8% in extended hours trade today at $102.78.

Investors will hope that the peaks seen in November and February at $101 will provide some new support, but we could see the stock slip back toward the 100-day and 50-day moving averages if the pressure persists. A larger move down toward $85 could be on the cards beyond here.

The stock has recently broken out of a downtrend that had been in play for 10 months and trading volumes are likely to rise for a fifth consecutive session today. If it can regather some momentum then it will need to recapture $105, marking the level of support we saw between May and September 2022 and in-line with the 200-day moving average. From here, a larger jump toward $119 could be possible.

The average target price among 48 brokers that cover the stock sits at $124.87, implying there is over 20% potential upside from current levels. We have seen this experience a mild fall in recent months, and we saw some changes made this morning. Several brokers raised their view this morning, including Baird to $120 from $115, Evercore ISI to $125 from $120 and Jefferies to $130 from $125. Piper Sandler trimmed its view to $120 from $122.

Take advantage of extended hours trading

Alphabet released earnings after US markets closed and most traders must wait until they reopen the following day before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.

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