Google issues its first dividend, with Q1 revenue, advertising, and cloud revenue all accelerating, rising 15% to a new high after hours | Financial report insights

After the U.S. stock market closed on Thursday, April 25th, the global digital advertising and search giant, Alphabet, the parent company of Google, which is also aggressively entering the AI field, released its first-quarter financial report for 2024.

Due to accelerated growth in advertising and cloud revenue, all indicators exceeded expectations. Alphabet's stock price surged more than 15% to a historic high after hours on Thursday. If this momentum continues into Friday's opening, it will increase the market value by approximately $300 billion.

Alphabet's Class A shares fell by about 2% on Thursday, ending a three-day consecutive rise. The stock has risen by over 11% year-to-date, significantly outperforming the market. Over the past 12 months, it has risen by 50%.

Due to optimism about the strong performance of its core search business, YouTube advertising, and cloud services, Wall Street consensus rating for Alphabet is "strong buy". Out of 30 analysts, 30 recommend "buy", 7 recommend "hold", and none recommend "sell". The average target price is $167.51, representing a potential upside of 9%.

Google Q1 Revenue Growth Accelerates to Fastest in Two Years, Profit Surges 60% YoY, Capital Expenditure of $12 Billion on AI

The financial report shows that Alphabet's total revenue in the first quarter was $80.54 billion, a 15% year-on-year increase, the fastest growth since early 2022, and higher than the market's expected $79.04 billion. Adjusted earnings per share were $1.89, far exceeding the expected $1.53, and a 61.5% year-on-year increase from $1.17 in the same period last year. Net profit soared by 57% year-on-year to $23.66 billion, higher than the expected $18.95 billion.

Compared to the revenue of $86.31 billion, earnings per share of $1.64, and net profit of $20.69 billion in the fourth quarter of last year, Alphabet's first-quarter revenue declined sequentially, in line with market expectations. However, profit was unexpectedly boosted, benefiting from the positive impact of AI.

Overall, Google's year-on-year revenue indicators are accelerating. In the third quarter of last year, its total revenue saw a double-digit year-on-year growth for the first time in over a year. Previously, the growth rate had dropped to single-digit percentages for four consecutive quarters, mainly due to weakening spending by advertisers due to soaring inflation and the Fed's aggressive rate hikes.

Wall Street generally believes that the increasing demand for artificial intelligence generated by integrating generative AI into products may continue to boost its cloud business revenue in the coming quarters. Additionally, revenue from advertising dominated by search and YouTube is also improving in line with industry trends Google's Traffic Acquisition Cost (TAC) paid to partners in the quarter was $12.95 billion, exceeding the market's expected $12.74 billion, impacting profits. However, the operating profit margin expanded from 25% in the same period last year to 32%, higher than the expected 28.6%. In the highly anticipated AI investment, Google's capital expenditure for the quarter was $12 billion, $1.7 billion more than expected.

The company stated that researchers made rapid progress with the large language model Gemini, with increased capital spending reflecting investments in infrastructure. Google is beginning to deploy AI summaries on major search pages.

CEO Pichai stated in a release that Alphabet's leading position in AI research and infrastructure, as well as its global product footprint, positions the company favorably in the next wave of AI innovation.

Their financial report also stated:

"As announced on April 18, we are integrating teams focused on building AI models from Google Research and Google DeepMind to further accelerate progress in the field of AI. The AI model development team previously under Google Research's Google Services division will be integrated into Google DeepMind as part of Alphabet-level activities, expected to begin in the second quarter of 2024."

Cloud business growth re-accelerates to around 28% from early last year, with operating profit quadrupling

Looking at the segments, the cloud business, which is most concerned by the market and seen as Google's next growth engine, saw first-quarter revenue increase by 28.4% year-on-year to $9.57 billion, higher than analysts' expected $9.37 billion. It had grown by 25.7% to $9.19 billion in the fourth quarter of last year, doubling the growth rate for several quarters compared to overall revenue growth.

This also represents a re-acceleration in the year-on-year growth rate of Google Cloud revenue, pleasing Wall Street and effectively driving the stock price surge after hours. Cloud revenue in the third quarter of 2022 had grown by 37.6% year-on-year, slowing to 32%, 28%, 28%, and 22% in the fourth quarter of the same year and the first three quarters of 2023, respectively. Re-acceleration since the fourth quarter of last year helps alleviate analysts' concerns about its growth stagnation.

At the same time, Google Cloud's operating profit surged from $190 million in the same period last year to over $900 million, continuing on the path of turning losses into profits, showing that years of investment are finally yielding substantial returns.

Prior analysis suggested that Google Cloud business is a key investment area for the company. With the emergence of generative artificial intelligence, this business has become even more crucial as more companies are shifting to public clouds to run heavy workloads.

Ranked third in the cloud computing market share, Google is still striving to catch up with competitors Amazon and Microsoft. Google Cloud includes the Google Cloud Platform (GCP) for enterprise customers, providing infrastructure and data analytics platforms, as well as productivity and collaboration tools (Google Workspace). It accounts for nearly 12% of total revenue, still trailing behind the leader in the cloud sector, Microsoft.

Steady improvement in advertising revenue surpasses expectations, while the scale of innovative businesses burning money narrows year-on-year

The core advertising business is also a major revenue driver closely watched by Wall Street for Google. Advertising revenue in the first quarter grew by 13% year-on-year to $61.66 billion, exceeding the expected $60.18 billion, representing accelerated growth starting from 2023.

Among them, advertising revenue from the YouTube video platform increased by nearly 21% year-on-year to $8.09 billion, higher than the expected $7.72 billion. Google's search and other advertising revenue also grew by over 14% year-on-year to $46.156 billion.

This signifies a steady improvement in its advertising revenue. Due to economic weakness in 2022 and increased competition from TikTok, Google's core advertising business had weakened, but since the fourth quarter of 2022 when the business showed negative growth, advertising revenue has been improving.

Previous analysis pointed out that generative artificial intelligence can provide more creative and comprehensive answers for simple text queries. If people change the way they search for information online because of this, it could have a significant impact on Google's core search and advertising business.

"Other Bets" used to be Google's technology innovation department, focusing on forward-looking product development and risk investment, including autonomous driving startup Waymo, smart medical Verily, venture capital funds Google Capital and Google Ventures, etc.

This business saw revenue increase by nearly 72% year-on-year to $495 million in the first quarter, higher than the expected $372 million. Operating losses were $1.02 billion, narrower than the over $1.2 billion loss in the same period last year, and better than the market's expected loss of $1.1 billion.

In addition, Google's service revenue in the quarter increased by 13.6% year-on-year to $70.4 billion, surpassing the market's expected $69 billion. Operating profit also increased by over 28% to nearly $27.9 billion, significantly higher than the market's expected $24.3 billion.

Alphabet Makes First Quarterly Dividend Payment in Company History, Plans to Repurchase Up to $70 Billion in Stocks

One of the factors driving Google's stock price to a new high after hours is Google's decision to make its first quarterly dividend payment.

Alphabet announced that its board of directors has approved a cash dividend of 20 cents per share to shareholders registered as of June 10, to be paid on June 17, and "intends to continue paying quarterly cash dividends in the future." The company has also authorized the repurchase of up to $70 billion in stocks.

As of the end of the first quarter, Alphabet's cash, cash equivalents, and marketable securities totaled $108 billion, slightly lower than the $110.9 billion in the same period last year. The global workforce decreased by 5.1% year-on-year, or 9,800 people, to approximately 181,000.

Some analysts suggest that the number of employees may be the most important figure in this financial report. "Google has also (following Meta) embarked on a year of efficiency, reducing its workforce by nearly 10,000 people, while operating profit margins have surged from 25% to 32%."

What's in Focus?

The outlook for artificial intelligence remains a key focus of Alphabet's financial report this quarter, especially whether it can drive accelerated growth in Google Cloud revenue. Analysts will pay close attention to the latest developments in artificial intelligence plans and the Gemini AI model.

CFRA predicts that Google Cloud's revenue growth will remain at least 25% for the full year 2024, helping alleviate concerns about stagnant growth. Bank of America states that strong search revenue will help boost market sentiment towards AI.

Some analysts are also focusing on Google's profit margins, "as the company has not actively cut costs like other major tech giants." Google has also launched its self-developed artificial intelligence chip Axion tailored for data centers, which will increase AI development expenses.

Wall Street's View

The 2024 Paris Olympics and the U.S. presidential election are expected to improve the advertising environment, seen as key drivers supporting Google's financial performance.

Goldman Sachs states that industry trends indicate strong revenue in the search business this year, with YouTube revenue also showing signs of recovery. Jefferies remains bullish on Google for the second half of this year, "as they see improvement in the momentum of the core advertising business and increased visibility into the AI-driven boost in 2025." CFRA mentions that there are incremental opportunities related to the monetization of artificial intelligence in cloud, search, YouTube, and Google's other businesses.

However, the long-term intensification of competition in the AI field, and even the risk of disrupting Google's core search business, as well as tightening regulations in Europe and the U.S., pose certain challenges. Bernstein warns that any misstep by Alphabet could "sound the alarm for artificial intelligence." Monness Crespi Hardt, an investment bank that rates the stock as "hold," believes that Alphabet is in a favorable position to capitalize on the digital advertising trend, establish a lasting cloud business, and innovate with artificial intelligence:

"However, the regulatory environment is not optimistic, competition risks are intensifying, Google's internal execution is uneven, and coupled with the possibility of macroeconomic downturn, perhaps the darkest days are still ahead."

Jefferies attributes some of the uncertainties to speculation about the new stock repurchase authorization and the new CFO replacing Ruth Porat, who announced last year that she would step down as CFO and instead serve as Chief Investment Officer and President.

Last week, Google announced a restructuring of its finance department to allocate more resources to the field of artificial intelligence and integrate the AI team under Google DeepMind, predicting that "the tech industry is in the midst of a huge platform shift brought by AI."

KeyBanc expects that as Google focuses more on product speed and departmental restructuring in the AI era, there may be further layoffs in the second quarter of this year, but this indicates that operating profit will further increase:

"As Alphabet continues to invest in AI infrastructure, capital expenditures this year may reach $42 billion, further increasing to $46 billion next year."

Some analysts have pointed out that Alphabet encountered some setbacks in artificial intelligence at the beginning of this year, with issues with the image generator leading the company to withdraw the tool from the market. Google also fired dozens of employees who were involved in a series of protests against labor conditions and providing cloud computing and AI services to the Israeli government and military:

"In addition, the U.S. Department of Justice's lawsuits against Google's search distribution business and another lawsuit against its online advertising business have also attracted attention, not to mention European legislation aimed at creating a more competitive digital environment, including the Digital Markets Act and the upcoming EU Artificial Intelligence Act."