Alphabet Investors Fret Over Margin Impact Of Higher AI-related Capex, But Fund Manager Says Not Spending Enough Exposes Google's Parent To Risk Of 'Losing Their Grip On The Future'
Alphabet, Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG) reported second-quarter earnings and revenue that exceeded expectations but some key metrics trailed, including YouTube ad revenue, came to light. Management comments on the margin trajectory also did not augur well with investors, sending the stock down in after-hours trading.
Munster’s Key Earnings Takeaways: Deepwater Asset Management’s Gene Munster noted that Search business revenue climbed 14% year-over-year, the same rate as in the first quarter, and Cloud revenue growth accelerated slightly from 28% to 29%. YouTube ad revenue climbed 13% but at a slower pace than the 21% growth reported for the first quarter.
He noted that the capex was $13.19 billion, terming it as good news as the company builds out its artificial intelligence future.
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Earnings Call takeaways: Ahead of the earnings, the tech venture capitalist listed the following as key focus areas on the call and here are the key takeaways on each of these:
SGE Traction: Munster sees Search Generative Experience (SGE) expanding the universe of queries, Munster said. “I believe Sundar is correct that SGE will expand the number of queries and ultimately create new monetization opportunities that more than offset the lost traditional search revenue.”
On the call, the CEO said with AI, Search delivered better responses on more types of search queries and introduced new ways to search.
“We are pleased to see the positive trends from our testing continue as we roll out AI Overviews, including increases in Search usage and increased user satisfaction with the results,” Pichai said. He also noted higher engagement from younger users, aged 18-24 years when using Search With AI Overviews.
CapEx: Ahead of the results, Munster said he expected CapEx to grow somewhere between 70% and 80% in 2024, with the company likely exiting 2024 at about $60 billion compared to $32 billion in 2023. CFO Ruth Porat said on the call that the second-quarter capex was $13 billion, driven by investment in the company’s technical infrastructure, primarily in servers followed by data centers. She also sees quarterly capex to be roughly at or above the first-quarter level of $12 billion, with the low-end estimates suggesting capex of at least $49 billion for the rest of the year.
Following the call, Munster said he expects analysts to bump up CapEx estimates by 50-55%, up from the previous expectations of 45%. “Ultimately, I believe they’ll grow CapEx at +70% because if they don’t, they run the risk of losing their grip on the future,” he added.
Macro state of the ad market: “Google is a bellwether for anything advertising-related, especially Meta Platform, Inc.’s (NASDAQ:META) business,” Munster said, adding that it is also a general read on the state of the economy. Alphabet noted on the call that there has been a shift in brand advertising budgets from linear TV to YouTube. “Our largest advertisers across verticals, including retail, entertainment, telco, and home and personal care, are partnering with creators on ads and organic integrations,” it said.
The company attributed the 14% growth in Google Search and other advertising revenue to growth in retail followed by the financial services vertical. Ahead of the results, Wedbush’s Daniel Ives modeled 12.8% growth for the business.
Alphabet said, “As we look forward to the third quarter, we will be lapping the increasing strength in advertising revenues in the second half of 2023, in part from APAC-based retailers.”
In premarket trading on Wednesday, the stock fell 3.04% to $176.27, according to Benzinga Pro data.
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