Alphabet Posted Impressive Earnings Numbers but Future Advertising Revenues Uncertain

Alphabet (GOOGL) reported on Tuesday, July 27, that its Q2 of fiscal 2022 diluted earnings per share (EPS) stood at $1.21, pushing it 11% lower compared to the same period a year ago. Revenues grew by 16% in local currencies in Q2, after growing 57% last year, demonstrating Alphabet's resilience in an uncertain world.

Q2 revenues jumped 13% YoY to $69.7 billion, while net income came in at $16 billion after falling 14% from Q2 2021. Operating income barely grew by just 0.50% and reached $19.45 billion.

Overall, Q2 results support Google’s investment case, but with certain remarks stemming from new economic realities. Alphabet revenues grew by 16% in local currencies in Q2, after growing 57% last year, demonstrating Alphabet's resilience in an uncertain world. However, EBIT margin fell, and it raises legitimate concern over sustainability of advertising revenue amid economic slowdown and rising cost of living for the advertisers. After the previous week’s disappointing digital advertising numbers from Snap (SNAP), the market expected general weakness from the advertising revenues of Alphabet as well, but the company actually performed in this respect generally in line with expectations to much of a surprise to the market.

"In the second quarter our performance was driven by Search and Cloud. The investments we've made over the years in AI and computing are helping make our services particularly valuable for consumers, and highly effective for businesses of all sizes. As we sharpen our focus, we'll continue to invest responsibly in deep computer science for the long-term," Alphabet and Google CEO Sundar Pichai said in the press release.

The company's Class A shares rose by 2.85% and Class C stock gained 3.02% in extended trading following the release of the report, but remained 27% below their peak and at 17.7x P/E. The stock trades at an EV/Net of only around 12.5x '23 EPS targets, which is also very attractive. Alphabet has two classes of shares, A and C, with the same shareholder rights and similar prices.