11 Alphabet Analysts On Q3 Earnings Miss, Surprise YouTube Revenue Decline

Zinger Key Points
  • "The latest results create a lower band of '23 'trough margins' and profitability," says one analyst.
  • Alphabet says it will reduce hiring by more than 50% in the fourth quarter.
11 Alphabet Analysts On Q3 Earnings Miss, Surprise YouTube Revenue Decline

Alphabet, Inc. GOOG GOOGL shares were trading lower on Wednesday after the company disappointed Wall Street with its third-quarter earnings.

On Tuesday, Alphabet reported third-quarter adjusted EPS of $1.06 on revenue of $69.09 billion. Both numbers missed consensus analyst estimates of $1.25 and $70.58 billion, respectively. Revenue was up 6% from a year ago.

YouTube advertising revenue was $7.07 billion, down 2% and missing analyst estimates of $7.42 billion. Google Cloud revenue of $6.9 billion beat analyst estimates of $6.69 billion.

Looking ahead, Alphabet said it will reduce its hiring by more than 50% in the fourth quarter as the company prioritizes cost management.

Related Link: 7 Snap Analysts On Q3 Sales Miss: 'Meaningful Competition From TikTok'

Alphabet's Discipline, Efficiency: Morgan Stanley analyst Brian Nowak said Alphabet is searching for discipline and efficiency, which creates growth uncertainty heading into 2023.

"Essentially, the latest results create a lower band of '23 'trough margins' and profitability…potentially leaving GOOGL tactically range bound," Nowak wrote.

Raymond James analyst Aaron Kessler said 38% Google Cloud revenue growt was a silver lining in an otherwise negative quarter.

"GCP growth continues above overall cloud revenue growth reflecting growth in both infrastructure and platform services," Kessler wrote.

RBC Capital Markets analyst Brad Erickson said Alphabet's quarter was exactly what bears were hoping for.

"With management somewhat minimizing the magnitude of ad spend pullbacks in Q3, it was clearly articulated that pullbacks will likely worsen in Q4 which when combined with Fx, could easily send Street models pointing to y/y declines in the upcoming 2-3 qtrs," Erickson wrote.

Related Link: 5 Adobe Analysts React To Earnings Beat, Guidance Miss, Figma Acquisition

Alphabet's Margin Pressures: Mizuho analyst James Lee said Alphabet will continue to deal with margin headwinds in the near-term.

"While we believe the company has a lot of capacity for a major cost cut, the timing and clarity are important to mitigate near-term headwinds," Lee wrote.

JMP analyst Andrew Boone said the difficult macroeconomic environment is even impacting Alphabet's Search revenue growth, which decelerated to 4.3% year-over-year in the quarter.

"While we acknowledge the tough macro environment, our belief that Alphabet remains well positioned across most major digital secular growth trends is unchanged as AI is improving results for advertisers, YouTube is taking share of linear TV budgets, and GCP should win more IT budgets from ongoing cloud growth," Boone wrote.

Rosenblatt Securities analyst Barton Crockett said it's not surprising Alphabet's ad business is feeling the impact of a macroeconomic downturn ahead of a potential U.S. recession.

"This also happened in 2009, and growth, after a few quarters of slowdown, rebounded," Crockett wrote.

YouTube Strategy: Needham analyst Laura Martin said Alphabet's report that viewers are consuming 700 million hours of YouTube content on TV screens on a daily basis was impressive.

"However, there was zero strategic discussion of how GOOGL will transition its economics from mobile environments (which drive 90% of its revs) to better align with the structural shift of consumer time toward CTV (ie, large) screens, which lowers time spent & advtg revs on mobile devices," Martin wrote.

KeyBanc analyst Justin Patterson said the key question for investors is how quickly Alphabet can moderate its expense growth heading into 2023.

"With more macro headwinds evident, we believe the debate centers on how quickly management can rein in expenses to prevent margins from reverting to 2019-2020 levels," Patterson wrote.

Bank of America analyst Justin Post said Search growth slowed along with a slowing economy, and Alphabet's spending cuts were not as aggressive as he anticipated.

"We think uncertainties on macro and more deceleration is likely, but with core business trading at 12x our 2023 estimates in our sum-of-parts (using AH price), search facing minimal competitive risks, more expense flexibility than peers, healthy margins that will minimize cash flow concerns, and opportunity to support stock with buybacks we see Alphabet as a defensive stock with valuation support," Post wrote.

Alphabet's Cloud Strength: Credit Suisse analyst Stephen Ju said Alphabet should continue to monetize its Search revenue by integrating new products and artificial intelligence.

"Separately, Cloud once again produced better-than-expected results with segment revenue growing 38% vs our 31% (inclusive of Mandiant which closed in Sep) – we believe ‘cloud’ is growing at ~40%+," Ju wrote.

Barclays analyst Ross Sandler said the pace and magnitude of margin compression in Alphabet's core Google Services segment is somewhat alarming.

"Mix shift away from high-margin businesses like Desktop/Mobile Search and Play Store revenue, and towards low/negative margin businesses like Subscription, Hardware and Other within Google Services is driving margins lower, and unfortunately it likely gets worse over the next few quarters before getting better," Sandler wrote.

GOOGL Ratings And Price Targets:

  • Morgan Stanley has an Overweight rating and lowered the price target from $135 to $125.
  • Raymond James has an Outperform rating and cut the price target from $143 to $120. 
  • RBC Capital Markets has an Outperform rating and lowered the price target from $135 to $130. 
  • Mizuho has a Buy rating and dropped the price target from $150 to $140. 
  • JMP has a Market Outperform rating and lowered the price target from $160 to $145.
  • Rosenblatt Securities has a Buy rating and cut the price target from $156 to $130.
  • Needham has a Buy rating and $160 target.
  • KeyBanc has an Overweight rating and lowered the price target from $120 to $118. 
  • Bank of America has a Buy rating and $114 target.
  • Credit Suisse has an Outperform rating and dropped the price target from $134 to $128. 
  • Barclays has an Overweight rating and $150 target.
Posted In: Aaron KesslerAndrew BooneBank of AmericaBarclaysBarton CrockettBrad EricksonBrian NowakCredit SuisseJames LeeJMPJustin PattersonJustin PostKeyBancLaura MartinmizuhoMorgan StanleyNeedhamRaymond JamesRBC Capital MarketsRosenblatt SecuritiesRoss SandlerStephen JuAnalyst ColorEarningsNewsPrice TargetReiterationTop StoriesAnalyst RatingsMoversTechTrading Ideas