Google parent Alphabet throws off cash as digital shift not expected to reverse

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Google owner Alphabet Inc (NASDAQ:GOOG) beat expectations for revenues and earnings as advertising around its search engine and YouTube platform continued to flourish.


The third-biggest company on New York’s Nasdaq exchange reported first quarter net cash of US$127.7bn, up from US$122.8bn at the start of the year as it generated free cash flow of US$18.7bn. This was up from US$11.6bn a year ago.


Quarterly revenues of US$65.1bn were up 41% on this time last year, slightly ahead of Wall Street forecasts, as the core Google search revenue rose 44%, smaller YouTube ads 43% and Google Cloud revenues 45%, with growth evenly spread geographically.


Operating profit margins improved from 24% to 32%, leading to operating profits jumping 87.6% to US$21bn, a big beat to Street forecasts.


Chief executive officer Sundar Pichai said: “Five years ago, I laid out our vision to become an AI-first company. This quarter’s results show how our investments there are enabling us to build more helpful products for people and our partners.


He said the digital transformation that accelerated during the pandemic and the shift to hybrid work were both persisting, helping boost its Cloud services arm.


Philipp Schindler, Google’s chief business officer, added: “The consumer shift to digital is real and will continue even as we start seeing people return to stores. The underlying takeaway is that people want more choice, they want more information, more flexibility, and we don’t see this reversing.”


One slight change has been from Apple’s changes to its operating system to require apps to get permission to track user behaviour, which Alphabet reported had a “modest impact” on YouTube ad sales.


The shares are pointing to a 0.4% decline to $2,783 in pre-market trading.


After the company repurchased US$12.6bn of shares during the quarter as part of the US$50bn share buyback announced in April, analyst Nicholas Hyett at Hargreaves Lansdown was reminded of watching the 1985 Richard Pryor film Brewster’s Millions, where a minor league baseball player must spend $30m in thirty days in order to inherit an even vaster fortune.


“Google faces a similar challenge,” he suggested.


“Another quarter of stellar growth and even stronger margins mean Alphabet is now generating free cash of $18.7bn every three months. That means that even after all its current investments, which range from driverless cars to biotech, the group would need to spend an extra $6bn+ a month just to break even. It’s a Brewster threshold the group will struggle to reach. There simply aren’t enough profitable projects in which the group can invest its embarrassment of riches.


“That’s certainly a nice problem to have, but it does leave us wondering what it intends to do with the nearly $130bn of cash it has lying around. Buying back $12bn of stock a quarter has barely put a dent in it.”

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