Google’s parent company Alphabet beat Wall Street’s earnings and revenue expectations for the fourth quarter of 2022, but shares fell in after-hours trading as growth in the company’s core advertising business came in slightly below analysts’ projections.
Alphabet said Tuesday that it earned $1.64 per share on revenue of $86.31 billion in the three months ending Dec. 31, surpassing Refinitiv consensus estimates of $1.60 per share on $85.25 billion in revenue. However, advertising revenue, which accounts for the bulk of Alphabet’s sales, rose 11% year-over-year to $65.52 billion – slightly missing expectations of $65.82 billion.
The quarterly advertising growth rate represents a deceleration from the previous quarter’s increase of 16%, raising concerns that Google’s ads business is slowing amid economic uncertainty. “We would like to point out that this is a fundamentally stronger quarter – gross revenue, search, YouTube, and cloud and Google other revenues all accelerated quarter-over-quarter,” said Evercore ISI analyst Mark Mahaney in a research note. “That said, we believe the price actions following the print reflect the higher expectations that weren’t exceeded.”
Alphabet’s stock fell 4.3% in after-hours trading following the earnings release. Heading into the report, shares of the tech giant had rallied 26% over the previous three months.
Silver Lining in Cloud and YouTube Growth
The quarter had some bright spots, especially in Alphabet’s non-advertising businesses. Revenue from Google Cloud jumped 25% year-over-year to $9.19 billion, surpassing estimates of $8.94 billion. Cloud growth accelerated from 22% in the third quarter, suggesting that Alphabet’s investments in cloud infrastructure and artificial intelligence capabilities are paying off as it competes against Amazon and Microsoft in this market.
YouTube advertising revenue also beat expectations, rising 15% to $9.2 billion. Together, the strong cloud and YouTube results point to the success of Alphabet’s strategy of diversifying its revenue streams beyond just selling search and display ads.
Regulatory Scrutiny Remains Overhang for Alphabet
Alphabet faces ongoing antitrust pressure from regulators in the U.S. and abroad relating to its dominance in online advertising and search. Last year, the U.S. Department of Justice filed an antitrust lawsuit alleging that Google’s search distribution agreements with Apple and other smartphone makers give it an unfair advantage.
While Google has denied wrongdoing, regulatory risks present a headwind for the stock. Investors are keen to see how 2023 shakes out in terms of potential remedies imposed by regulators that could impact Google’s business model.
Shares Rebound from October Sell-Off
Heading into Tuesday’s report, Alphabet’s stock had already rebounded strongly from a steep 13% single-day decline on October 25, 2022 after its third quarter earnings missed estimates due to weakness in YouTube ad spending. The stock hit a low of $121.46 on October 27 before rallying 26% over the next three months prior to the latest earnings release.
In 2022, Google’s stock soared 58% compared to a 21% loss for the S&P 500 index. The outperformance reflects Alphabet’s steady growth and strong free cash flow generation. Alphabet also repurchased $16.2 billion of its stock in the fourth quarter, following $15.78 billion of buybacks in the third quarter, which helped support its share price.
Alphabet faces a challenging macroeconomic environment heading into 2023, with advertisers likely to continue pulling back spending if consumers reduce their discretionary purchases. However, the company has levers it can pull to maintain earnings growth, including tightening hiring and decelerating investment in new projects. With strong free cash flow and more than $114 billion in cash on hand, Alphabet appears well positioned to ride out an economic downturn.
