Alphabet shares sink after Q4 advertising revenues miss estimates

Alphabet shares (NYSE: GOOG) are trading sharply lower today in US price action after releasing its Q4 earnings. While the company posted better-than-expected revenues and profits in the quarter, its advertising revenues trailed estimates.

Alphabet reported revenues of $86.3 billion in the December quarter which was 13% higher than the corresponding quarter in 2022. In the full year, Alphabet’s revenues increased 9% to $307 billion.

Key takeaways from Alphabet Q4 earnings

While the company’s Q4 revenues were slightly ahead of what analysts were expecting, its advertising revenues of $65.52 billion fell short of the $65.94 billion that analysts expected. YouTube revenues of $9.2 billion too were slightly short of the $9.21 billion that analysts expected. The company’s subscription revenues however hit a milestone of $15 billion.

Meanwhile, Google cloud revenues rose to $9.19 billion which was ahead of the $8.94 billion that analysts expected. Notably, in the previous quarter, Alphabet’s cloud revenues fell short of estimates and the share crashed after the earnings release to have its worst day since March 16, 2020.

So far also, Alphabet’s post-earnings price action is the worst among FAANG peers and tech majors even as giants like Apple, Meta Platforms, and Amazon are yet to report their quarterly reports.

Alphabet posted better-than-expected earnings

Alphabet posted an earnings per share of $1.64 which was ahead of $1.59 which analysts expected and 56% higher than the corresponding quarter last year. Importantly, the company’s cloud business also posted an operating profit of $864 million as compared to an operating loss of $186 million in Q4 2022.

The company’s Other Bets segment which includes the Waymo self-driving unit posted revenues of $657 million as compared to $226 million the year prior. The segment’s losses narrowed to $863 million from $1.24 billion. Notably, the segment’s perennial losses have been a bone of contention between Alphabet and some shareholders and in 2022 TCI Fund Management wrote a letter to the company calling upon the management to cut losses in the segment.

In his prepared remarks, Alphabet’s CEO Sundar Pichai said, “We are pleased with the ongoing strength in Search and the growing contribution from YouTube and Cloud. Each of these is already benefiting from our AI investments and innovation. As we enter the Gemini era, the best is yet to come.”

Gemini LLM

In December, Alphabet launched its large language model Gemini and during the earnings call, the management talked in detail about the initiative.

“We are already experimenting with Gemini in Search, where it’s making our Search Generative Experience, or SGE, faster for users. We have seen a 40% reduction in latency in English in the U.S. I’m happy with what we are seeing in the earliest days of SGE,” said Pichai during the earnings call.

Notably, Microsoft and Advanced Micro Devices also put a lot of emphasis on their AI (artificial intelligence) initiatives during the earnings call. Last year, the euphoria towards AI helped drive up tech shares and Nvidia soared to become a trillion-dollar company.

However, after the earnings reports from Microsoft and Alphabet, some are apprehensive about how fast these companies can monetize the massive investments that they are making in generative AI.

For instance, Alphabet’s capex in Q4 rose 45% YoY to $11 billion and the company said that it expects capex to be significantly higher in 2024 as compared to the last year.

Analysts on GOOG earnings

Gene Munster, a managing partner at Deepwater Asset Management, said that he was looking for more from Alphabet and Microsoft and said, “Investors want to see more contribution from AI.”

Berstein analysts said in a client note, “The only problem here is that Google reported earnings the same night as Microsoft … (it is) hard to get that AI multiple pixie dust if larger cloud players are growing faster off of larger revenues.”

Meanwhile, a flurry of analysts raised their target price on Alphabet and Microsoft despite the lackluster performance of their AI segments.

Morgan Stanley for instance reiterated its overweight rating on Alphabet while raising the target price by $15 to $165 while JPMorgan raised its from $160 to $165. Susquehanna analyst Shyam Patil also raised his target price on Alphabet from $150 to $170.

Meanwhile, even as Google’s advertising revenues trailed estimates, Brian Wieser, an analyst at media and advertising consultancy Madison and Wall, said that markets should tone down their expectations of the company given its size.

Weiser said, “In my general conversations with public market investors and sell-side analysts, few have a correct view of the advertising market.” He added, “Many think that growth can continue at double-digit levels for the fastest-growing companies for much longer a period of time than is realistic to expect.”

 Alphabet hit record highs ahead of earnings

Ahead of the earnings report, both Microsoft and Alphabet hit record highs as tech shares continued their uptrend from 2023. However, the earnings have been a reality check, especially for AI plays as markets weigh the higher capex against the revenues that these initiatives are generating.

As Katrina Dudley, a portfolio manager and analyst at Franklin Templeton, said on Bloomberg Television, “Companies are continually having to prove themselves and continually prove the value proposition of AI.”

Evelyn Mitchell-Wolf, an analyst at Insider Intelligence also echoed similar views and said, “Google advertising does make up the vast majority of its revenue.”

She added, “As it prepares to really go full throttle on all of its carefully laid plans in AI, having that cash cow experience volatility doesn’t bode well.”