There was a lot of angst headed into Alphabet's (GOOGL +1.78%)(GOOG +1.81%) fourth-quarter 2022 earnings report, and not just because of worries about a slowing global economy and subsequent pullback in advertising spend. Investors had already been bracing for declining digital ad sales, which impact Alphabet's bread-and-butter Google Search business. More worrisome was Microsoft's (MSFT +0.05%) expanded $10 billion investment into ChatGPT, an apparent shot at Google as the public cloud giants gear up for another decade of next-gen IT investment.
Though Alphabet's earnings update on Thursday was far from perfect, it did assuage some jitters, especially with its strength in Google Cloud. With Alphabet stock still down big over the last year, is now a good time to buy?
NASDAQ: GOOGL
Key Data Points
The U.S. dollar takes a toll
Alphabet's Q4 2022 revenue was up a pitiful 1% year over year to $76 billion. Management blamed a slowdown in advertiser activity as the primary culprit. However, just as was the case for much of 2022, a record run-up for the U.S. dollar (a side effect of the Federal Reserve's aggressive interest rate hikes) also took a big bite out of growth. As can be seen from the increase in the Invesco DB US Dollar Bullish Index portrayed in the chart below, the dollar was well above 10% higher year over year for the duration of the fourth quarter, which lowers the value of international sales and profitability for Google.
Data by YCharts.
Excluding negative currency exchange rates, total revenue in Q4 would have been $80 billion, or up 7% year over year.
Google Cloud's exceptional finish to 2022
There was still lots to like in Alphabet's report, especially in the Google Cloud segment. Even with the bad hit from the dollar, Google Cloud revenue surged 32% year over year to $7.3 billion. That's impressive considering the Q4 2022 growth rates for Microsoft's overall cloud business (including Azure) and Amazon's (AMZN 1.09%) Amazon Web Services (AWS).
|
Public Cloud Business |
Q4 2022 Revenue |
Change (YOY) |
|---|---|---|
|
Google Cloud |
$7.32 billion |
32% |
|
Microsoft Intelligent Cloud (including Azure) |
$21.5 billion |
18% overall; Azure up 31% |
|
AWS |
$21.4 billion |
20% |
Data sources: Alphabet, Microsoft, and Amazon. YOY = year over over.
Clearly, Google Cloud is a much smaller business than Azure or AWS. Nevertheless, with cloud spending decelerating as companies around the world fret over a possible recession, Google Cloud is catching up.
That's great news for Alphabet shareholders, and not just because growth in the segment is helping offset weakness in Google Search and advertising. As Google Cloud expands, it continues to approach breakeven from an operating profit standpoint. Google Cloud operating margin was negative 6.6% in Q4 2022, compared to negative 16.1% in the year-ago period.
Google yawns at Microsoft's big bet on artificial intelligence
But what of Microsoft's $10 billion bet on ChatGPT creator OpenAI, and the plan to infuse artificial intelligence (AI) services like ChatGPT throughout its extensive cloud and software suite? Yeah, Google's already on the case. In fact, much of Google's open-source work on AI helped make services like ChatGPT possible in the first place. In the conference call with analysts, Alphabet CEO Sundar Pichai rattled off a list of AI services already available, and hinted that new features in response to ChatGPT will soon be announced for software developers and consumers alike.
Pichai's message on the earnings call was basically: We invented AI.
Indeed, whether it's advertising tools, helpful Google search prompts, or AI models for developers and engineers, Google already has what Microsoft just invested in. It has plenty of firepower to bring all that AI work to market via its extensive cloud services. Alphabet ended the year with $114 billion in cash and short-term investments, and only $14.7 billion in debt.
Of course, Alphabet has other concerns, like yet another antitrust lawsuit that wants to break up the Google digital advertising empire. But I believe those risks are effectively baked into the current valuation. Alphabet stock trades for 23 times 2022 earnings per share, and 23 times 2022 free cash flow. U.S. dollar headwinds will eventually ease, perhaps by the second half of 2023, as will fears of a recession among advertisers. Alphabet's empire is still a long-term growth business. This stock still ranks as a buy in my book.
