Should I buy Alphabet stock after its Q2 earnings?

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Google’s parent company Alphabet (NASDAQ: GOOGL) released its earnings results after the US market closed yesterday. Although revenues in every sector showed growth, figures across the board missed analysts’ expectations. With that in mind, should I still buy Alphabet stock?

Snapping back

With Alphabet missing both its top and bottom line consensus, I was surprised to see the stock pop as high as 5% in after-hours trading. There could be several reasons for this. However, I’d attribute it to the increase in advertising revenue despite Snap’s lacklustre Q2 earnings last week, which warned of lower ad spending last quarter.

Metrics Q2 2022 Analysts Estimates Growth vs Q2 2021
Total Revenue $69.7bn $70.0bn 13%
Operating Income $19.5bn $23.2bn -3%
Diluted Earnings Per Share (EPS) $1.21 $1.30 -11%
Traffic Acquisition Costs (TAC) $12.2bn $12.3bn 12%
Source: Alphabet Q2 2022 Earnings Results

Having said that, all of Alphabet’s core businesses saw growth on a year-on-year (Y/Y) basis. These figures defied the doom and gloom Snap posted in its earnings report, which spooked the stock market into a sell-off.

Revenue Q2 2022 Analysts Estimates Growth vs Q2 2021
Google Advertising $56.3bn $58.3bn 12%
YouTube $7.3bn $7.5bn 5%
Google Services Total $62.8bn $63.5bn 10%
Google Cloud $6.3bn $6.4bn 36%
Source: Alphabet Q2 2022 Earnings Results
Alphabet: Earnings History
Source: Alphabet Investor Relations

Vision for the future

So, with an increase in its top line, why did the Nasdaq-listed firm see a decline in its EPS? The two main culprits were higher labour costs and further investments in tech. CEO Sundar Pichai said the tech giant is planning to continue heavily investing in developing its offerings.

Costs and Expenses Q2 2022 Q1 2022 Q2 2021
Cost of Revenue $30.1bn $29.6bn $26.2bn
Research and Development $9.8bn $9.1bn $7.7bn
Sales and Marketing $6.6bn $5.8bn $5.3bn
General and Administrative $3.7bn $3.3bn $3.3bn
Source: Alphabet Q2 2022 Earnings Results

The latest AI-integrated search features are already showing promise, as Multisearch and Google Lens have seen increasing levels of adoption among users. The feature brings up relevant information related to objects it identifies using visual analysis. This allows people to use text and images at the same time, while giving users the ability to ask questions about what they see.

On the YouTube front, Alphabet announced a partnership with Shopify last week. This collaboration enables Shopify merchants to feature their products across YouTube channels and content. And with YouTube Shorts continuing to grow fast, this feature could help to monetise it.

As for Cloud, I was happy to see revenues continuing to hit fresh highs. Pichai confirmed that demand for the service remains robust, with more enterprises expected to come on board as new features get added. The acquisition of Mandiant that’s expected to be completed by the end of the year should also help with this. As the bulk of the company’s capital expenditure went towards servers and data centres, I’m confident in Cloud’s long-term earnings potential.

Returning for more

Although such developments excite me as an investor, I’m well aware of the risks associated with investing in Alphabet. There’s the obvious macroeconomic headwind that’s expected to dent ad spend in the near term. This was confirmed by CFO Ruth Porat on the earnings call.

More worrying is the rise of TikTok. Google exec Prabhakar Raghavan admitted around 40% of Gen Z users prefer searching via TikTok or Instagram over Google. If it fails to improve its search features or win over users, Alphabet’s core business could be compromised.

Yet, I have confidence in this experienced team to continue developing its products and services, and fend off competition. The board has shown its ability to return value to its investors time and time again.  In fact, Q2 hosted the biggest share buyback in the company’s history. Therefore, I remain bullish and will look to buy more Alphabet stock for my portfolio while it’s cheap.

The post Should I buy Alphabet stock after its Q2 earnings? appeared first on The Motley Fool UK.

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John Choong owns shares of Alphabet (Class A Shares). Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Alphabet (A shares), Alphabet (C shares), and Shopify. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.