3Q22 EPS miss consensus estimates by 15%
- 3Q22 revenue of US$69bn (+6.1% y-o-y) largely driven by the 38% y-o-y growth in cloud business, was 2% below consensus
- GOOGL’s 3Q22 EPS of US$1.06 (-27% y-o-y), 15% lower than consensus
- GOOGL’s Cloud Platform (GCP) margin loss narrowed from -14% to -10% q-o-q in 3Q22
GOOGL topline missed street estimates by 2% with a slower growth of 6% y-o-y. GOOGL reported its fifth consecutive quarter of slowing sales growth of just 6% y-o-y reaching US$69bn in 3Q22, also 2% below consensus estimates. Management highlighted the drop is due to continued downdraft in online ad spending specially in areas such as insurance, loans, mortgage and cryptocurrencies. GOOGL’s search ad sales grew 4% y-o-y to US$39.5bn while YouTube ad revenue dropped 2% y-o-y to US$7.07bn. Overall advertising revenue reached US$54.48bn in 3Q22, up 2.5% y-o-y. Facing increasing competition from TikTok, YouTube in September placed ads in its quick-video competitor, Shorts, in an effort to bolster revenue.
GOOGL’s Cloud Platform (GCP) margins loss narrowed from -14% to -10% q-o-q. During 3Q22 GOOGL’s Cloud Platform (GCP) grew 38% y-o-y in revenue reporting US$6.9bn while operating losses widened 9% y-o-y to US$699mn. Operating margins have narrowed from -14% to -10% q-o-q which indicates the path to breakeven. GCP accounts merely 10% of the global cloud infrastructure market while AWS and Azure holding 32% and 21% with operating margins of 30% and 45%. We believe there is tremendous possibility for margin improvement for GCP in upcoming quarters.
GOOGL earnings were down 27% y-o-y amounting to US$13.9bn during 3Q22. EPS amounted to US$1.06 which is 15% lesser than consensus estimates of US$ 1.25 for 3Q22. Drop in earnings in 3Q22 was due to 17.9% increase in cost and expenses mainly from R&D (33.5% y-o-y) and S&M (25.6%). Management enacted some cost-cutting measures across the company such as cutting the headcount growth by half in 4Q, cancelling the next generation of its Pixelbook laptop, cut funding to its Area 120 in-house incubator, shuttering its digital gaming service Stadia, citing economic challenges, including a potential recession, soaring inflation, rising interest rates and tempered ad spending.
BUY GOOGL with a target price (TP) of US$126, based on a P/E of 24.0x