Google's parent company, Alphabet (NASDAQ:GOOGL) Inc., saw an 8% decrease in its stock following a disappointing Q3 earnings report. The company had anticipated that artificial intelligence (AI) would boost its cloud-computing business, but the growth rate fell short of expectations. The 22% growth in Q3 did not meet the anticipated 28%, according to Bernstein analyst Mark Shmulik.
Shmulik outlined three bullish factors for Alphabet's stock, but two of these were undermined by the recent earnings report. He pointed out that "optimization efforts," indicative of cost-conscious customers, have troubled Amazon.com Inc (NASDAQ:AMZN).'s AWS cloud-computing business for over a year and could potentially impact Google Cloud Platform (GCP). The scope and progression of these optimization issues within GCP are as yet unclear.
The analyst also expressed doubts about significant operating-margin expansion next year due to rising AI-related expenses and an annual $2 billion Sunday Ticket cost. Shmulik suggested that Google needs to restructure its cost base to maintain high-20s operating margins, leaving little scope for earnings and free-cash-flow growth.
The remaining positive factor for Alphabet is Google’s larger advertising business, which exceeded expectations in the recent quarter. Despite reservations about the future of search in an AI era, Shmulik believes the ad business is well-positioned for the upcoming promotional-heavy holiday season. He rates Alphabet’s stock at market perform.
Other analysts also shared their views on Alphabet's performance. Piper Sandler’s Thomas Champion expressed slight disappointment with recent commentary but maintained an overweight rating on the stock and increased his price target to $150. MoffettNathanson analyst Michael Nathanson highlighted competition costs in the AI arena as a concern for Alphabet investors.
Brad Erickson of RBC Capital Markets suggested that continued execution on search while integrating generative AI and accelerating YouTube could be a compelling approach into next year. Finally, Wedbush’s Scott Devitt held an outperform rating and a $160 target price on the stock, arguing investors are overvaluing Alphabet’s Cloud segment which comprises only ~11% of revenue.
InvestingPro's real-time metrics show that Alphabet Inc. has a market cap of 1600.0B USD, a P/E ratio of 24.5, and a PEG ratio of -2.37. The company's revenue for LTM2023.Q2 stands at 289.53B USD with a growth rate of 4.1%. Alphabet's gross profit for the same period was 160.96B USD, representing a gross profit margin of 55.59%.
InvestingPro Tips suggest that Alphabet yields high returns on invested capital and holds more cash than debt on its balance sheet. The company also operates with a high return on assets and is a prominent player in the Interactive Media & Services industry. However, it's worth noting that Alphabet's revenue growth has been slowing down recently. These insights and many more are available with InvestingPro's premium subscription for those who want to delve deeper into their investment strategies.
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