Three Key Questions About Alphabet Inc. Earnings in April 2023

Alphabet Inc. (NASDAQ: GOOGL) reported better-than-expected earnings for Q1 2023 after the market close on Tuesday, April 25, 2023. What happened during the release and earnings call, and what are the new questions to focus on?

1. Cloud was the big surprise. The business delivered its first profit, resulting in a +2% operating profit margin. At the time of the release, analysts expected this business to continue to generate -$1.2B in losses for the rest of the year.

New Question: Will this business break even for the rest of the year and beat expectations of a -$1.8B loss in 2023?

2. Costs: Analysts expected GOOGL’s operating profit margin to dip to 24% in Q1, but it came in higher at 25%, driven by Search and Cloud. This margin is projected to improve from Q2 to 27% levels. However, the company noted that its CAPEX will be modestly higher, as it plans to step up investment in AI.

New Question: Will AI investments start to add productivity gains to GOOGL and help to preserve profitability in Search?

3. Services: Revenues came in flat, but the operating profit came in $1B better than expected, resulting in a +35% margin. Is this sustainable going forward? Search revenue was expected to have declined -1% in Q1, but, instead was up 2% year over year, exceeding expectations by $1B. Travel and retail supported ad revenues in Search. Analysts expected this business to be up 4% in 2023. Will this business continue to show increases for the remainder of the year?

YouTube revenue was projected to be -4% but came in at -3%. Analysts were expecting this business to be flat next quarter and to increase by 7% in Q3 and a further 11% in Q4 to deliver $30B in 2023. Will increasing competition from Disney and Netflix be a headwind in H2?

Google Network disappointed with its sales down -8%, compared to an expected -6%. The company noted that the pullback in ad spend impacted this segment.

Operating profit for Services beat expectations by over $2B. At the time of the release, analysts expected Q2 to deliver a -3% year-over-year decrease, or $22B. Given the better-than-expected performance in Search revenue and profitability, will expectations increase for Q2?

New Question: Alphabet highlighted the focus on AI for search. Given the new competitive pressures from Microsoft in AI, how is the company going to increasingly defend its position and business model?