Alphabet Inc. GOOGL GOOG shares fell over 6.5% late on Tuesday following the release of its third-quarter results.
Commenting on the earnings, Loup Funds co-founder Gene Munster termed the results as a "disappointment but not terrible."
The Disappointment And Good News: Forex, though a 5% headwind, wouldn’t be an excuse as the company has hedged most of it, the analyst said. The biggest disappointment was a 2% year-over-year drop in YouTube revenue, missing Street estimates by 5%, he said. Search revenue rose 4%, slowing from the 14% growth in the second quarter and missing estimates by 4%.
The Cloud business beat estimates by 3% and the quarter-over-quarter growth accelerated from 36% to 38%, Munster noted.
“What we are seeing in Google results is the Snap impact on brand spending slowing because of the macro,” he said. The bigger picture is that Alphabet’s business is intact but macro is its biggest problem, Munster said.
Munster’s Takeaways From Q3 Earnings Call:
- Alphabet played up success in YouTube Shorts, putting the monthly user count at 1.5 billion. This would mean its subscribers exceeded that of rival TikTok. The negative, however, is low monetization and therefore it will be slightly dilutive to overall revenue.
- CFO Ruth Porat flagged tough comps and forex that would weigh on the December quarter’s growth rates.
- Alphabet plans to slow headcount growth in the December quarter and 2023.
- CEO Sundar Pichai reminisced about mobile powering growth for a decade after the company came out of the financial recession in 2010. He sees the next 10 years to be the decade of AI that sets Google well for growth. The near-term goal, according to the CEO, is to bring more AI into search to improve search quality with multimodal and visual features. Long-term, the company plans to bring more AI tools to Google Cloud to help companies build their own AI models.
Brace For Flat Growth: With Alphabet suggesting that tough comps and forex will have an impact on growth rates, Munster expects flat revenue growth for the December quarter compared to the previous estimate of 5%.
“Putting the results and call together: Google is impacted by the macro,” he said.
Google has historically been impacted by the macro and its business more than rebounds when the macro improves, the analyst said. In 2010, following the 2007-09 recession, Alphabet grew at 26% and averaged 25% growth in the five years following the recession, Munster added.
Price Action: Alphabet's Class A shares closed Tuesday's session 1.91% higher at $104.48 but shed 6.58% to $97.60 in after-hours trading, according to Benzinga Pro data.
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