Has Alphabet (GOOG) lost charm after its revenue and profit skid in Q2?

Among the four tech giants that reported quarterly results on Thursday, shares of Apple (NASDAQ: AAPL) and Facebook (NASDAQ: FB) achieved new 52-week highs on Friday with a hike of 10.5% and 8.2%, respectively. While Amazon (NASDAQ: AMZN) rose 3.7% on Friday, the laggard in this group was Google’s parent Alphabet (NASDAQ: GOOG/GOOGL), which fell about 3% amid its maiden drop in quarterly revenue.

Confounding numbers

All four tech companies did beat the quarterly earnings and revenue estimates. While the other three tech bellwethers stepped up in revenue and profit, Alphabet failed to do so in its second quarter. While the Mountain View, California-based firm’s revenue slipped 2% in Q2, profit plunged 30% year-over-year.

Ad revenue

Google’s advertising revenue slumped 8% in the quarter, due to the continued impacts of COVID-19 and the related reductions in global economic activity. The decline in advertising revenues was partially offset by continued growth in Google Cloud and other non-advertising businesses revenues.

When considering the decline in Google’s ad revenue, we should also note Facebook’s ad revenue growth of 10% in its second quarter was less than the 17% growth it registered in the first quarter of 2020. As the pandemic continued to impact the economy globally, business people have decreased their ad spending, and there have been a lot of changes in user behavior and preferences.

Investors’ worries

The Sundar Pichai-led company’s year-over-year revenue growth has been declining from its third quarter of 2019. Also, the annual ad revenue growth of 17% in 4Q19 declined to a growth of 10% in 1Q20 and now the growth percentage has turned to red. While operating income dropped 30% year-over-year, margin dropped 700 basis points in the just concluded quarter.

Also read: Highlights from the tech-antitrust congressional hearing

When comparing the other three big techies’ stock performance, Alphabet’s growth has not enthralled the investors. While the stocks of Amazon, Apple, and Facebook have gained 71%, 45%, and 24%, respectively so far this year, Alphabet shares have risen only 11%.  

Bright spots

Despite the drop in advertising revenue, there was traction in areas such as YouTube subscriptions, Google Play and Cloud during the second quarter. YouTube Premium Music and TV subscriptions performed well in Q2.

Google Cloud registered a 43% year-over-year growth in Q2, which is on par with Microsoft Azure revenue growth of 47% in its recently ended fourth quarter and better than Amazon’s AWS growth of 29% in its Q2.

Apart from these bright spots, management’s decision to add more manpower and the plans to reduce facility capex has drawn the attention of market watchers. To meet the demand in digitalization, the company has been hiring continuously in priority areas like cloud.

With Google other revenues increasing 26% in Q2, the company is anticipated to continue the positive momentum in the coming quarters also. Google has teased about the unveiling of its new model phone on its site, which is predicted to be Pixel 4a. We will get to know more details on this on Monday.

Expenses

Commenting on the hiring and operating expenses, CFO Ruth Porat stated,

“Although we still expect the pace of headcount growth to decelerate somewhat in 2020, we’re continuing to hire aggressively in priority areas like cloud. We still expect that headcount additions will be seasonally higher in Q3 as we bring on new graduates. Consistent with prior years, we expect sales and marketing expenses to be more heavily weighted to the back half of the year in part to support product launches and the holiday season.”

The search giant has decided to slow down the pace of acquiring office buildings in the near-term. In terms of technical infrastructure, Alphabet anticipates investment to remain at roughly the same level as in 2019 with relatively more spend on servers than on data center construction. As a result of these actions, the company expects capex to be lower in 2020 on the facility side.

Also read: Alphabet Q2 2020 earnings:  Important numbers

Still a great company

Shares of Alphabet are now down about 6% from its yearly high achieved ten days back. Once there is an advancement in the COVID treatment and vaccine, the economy is expected to bounce back. This, in turn, will help in the recovery of the business world. Once the dust settles down, the companies that have got strong fundamentals like Alphabet are foreseen to rebound to the pre-COVID levels.

Read Alphabet Q2 2020 earnings call transcript

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