Google parent company Alphabet (GOOGL) reported earnings after the market close on April 25. Here’s what our analyst thought of the latest quarterly numbers.

Key Morningstar Metrics for Alphabet

• Fair Value Estimate: $179
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

We’re increasing our fair value estimate to $179 from $171 per share. With the jump in the stock price following the earnings release, the shares now look fairly valued.

What We Thought of Alphabet’s Earnings

Alphabet delivered strong results during the first quarter, with revenue growth accelerating and restructuring efforts driving margin expansion. The firm also instituted a dividend, which will total about $10 billion annually at the initial rate and authorised an additional $70 billion of share repurchases. While growth likely won’t maintain this quarter’s pace throughout this year, Alphabet’s results position it to exceed our expectations for the year.

As with Meta, the firm is ramping up efforts to develop artificial intelligence technology, setting expectations that capital investment will continue at the current pace, implying full-year spending of nearly $50 billion versus about $32 billion each of the past two years. Alphabet is taking a tougher stance on costs than its AI rival, continuing to cut headcount and consolidating teams to blunt the impact of infrastructure investments on profitability.

Google Search and YouTube Advertising Higher

Total revenue increased 15% year on year versus 13% last quarter, continuing the accelerating trend seen over the past year, though the leap year added about 1% to growth. Search advertising increased 14%, with online retailers, including those based in Asia, driving growth. Asian retailers began stepping up spending in the second quarter of last year, which will create a headwind over the balance of 2024. YouTube advertising surged 21%, which management attributed to rapid improvement in the monetisation of Shorts, in addition to usage growth. The cloud business also delivered impressive growth, with revenue up 28%, the best result in more than a year, as AI use cases augmented growth in the compute and Workspace productivity businesses.

Continued strong subscriber growth drove an 18% increase in other Google services revenue from the prior year. As the firm announced earlier this year, YouTube TV now has more than 8 million subscribers, and we estimate that the service contributed about half of the growth in this segment.

The operating margin expanded nearly 4 percentage points to 32.5%, excluding heavy restructuring charges a year ago. Management expects efficiency gains across the business will offset increasing depreciation expense, allowing the operating margin to expand in 2024 versus the prior year. Capital spending nearly doubled year on year to $12 billion during the quarter, resulting in free cash flow dropping slightly to $16.8 billion.