Despite great financial results, Alphabet's main businesses are thriving but legal liabilities are a big concern
Alphabet‘s (NASDAQ:GOOG, NASDAQ:GOOGL) excellent first-quarter results show that the firm, in-line with my previous expectations, is continuing to benefit from the strengthening U.S. advertising sector. Its Google Cloud unit is also still growing rapidly. Moreover, I expect these favorable trends to persist going forward. On the other hand, worries about Alphabet’s legal battles are likely to keep Alphabet stock from outperforming in the near to medium term. So although I expect the tech giant to emerge largely unscathed from its court cases, I recommend investors sell the shares until the outcome of these cases becomes clearer.
Alphabet’s Superb Q1 Results
The tech giant’s top line jumped 15.4% versus the same period a year earlier to $80.54 billion, while its operating income climbed a huge 32% year-over-year (YOY) to $25.47 billion.
In-line with my previous thesis on GOOG stock, the firm’s ad revenue increased a solid 13% year-over-year to $61.66 billion. The large gain indicates that the company is indeed benefiting from higher ad spending in America. Additionally, the gain indicates that Alphabet’s search engine, which generates the lion’s share of its ad revenue, is not being undermined by Microsoft’s (NASDAQ:MSFT) popular ChatGPT artificial intelligence (AI) chatbot.
Also importantly, the sales generated by the firm’s cloud infrastructure unit, Google Cloud, climbed 13.6% YOY. Moreover, its operating income (OI) more than quadrupled last quarter versus the same period a year earlier to $900 million. Google Cloud last quarter generated 3.5% of Alphabet’s OI. The unit is starting to become a sizeable contributor to the firm’s bottom line. Given the unit’s excellent performance, I believe that it is beginning to benefit from selling Alphabet’s top-notch AI technology, along with the continued migration of companies’ data to the cloud.
Nearly all of Wall Street’s banks were upbeat on GOOG stock in the wake of the results. Most increased their price targets on the name to $200. For example, investment bank Jefferies noted the Alphabet’s search and YouTube businesses grew for the fifth straight quarter. Operating margins also increased five percentage points in Q1 compared with Q4.
Legal Issues Likely to Keep GOOG Stock in Check
On May 4, Alphabet and the Justice Department finished their closing arguments in the ad tech antitrust case against the company. Since Google faces ever-increasing competition in the internet ad market, I don’t expect the judge to order harsh penalties. Among the formidable competitors fighting with Alphabet for internet ad dollars are Meta Platforms (NASDAQ:META), Amazon (NASDAQ:AMZN), and ByteDance’s TikTok. Also Roku (NASDAQ:ROKU) and Netflix (NASDAQ:NFLX) are rapidly becoming formidable opponents in the digital ad arena.
Still, because Alphabet does dominate search, I wouldn’t be surprised if the judge imposes fairly minor restrictions on it. For example, he may prevent the company from paying Apple (NASDAQ:AAPL) to be the default search engine on iPhones. Or, he might limit Alphabet’s ability to prevent apps on Android from charging for services outside of the Android ecosystem. But in light of Alphabet’s gargantuan revenue, profits and internet search dominance over the last 20 years, I don’t expect these changes to materially impact its top and bottom lines.
For example, should Google lose its status as the iPhone’s default search engine, I expect the vast majority will continue using it. They have relied upon it for so long it is ingrained. And even if Alphabet’s revenue from the Android ecosystem drops by $2 billion annually, its financial results won’t be affected very much.
Large Investors Will Avoid Alphabet
But large investors tend to avoid buying the shares of companies facing significant risks in the short and medium terms. What’s more, in addition to the antitrust trial that just wrapped up, Alphabet faces additional trials in September and March 2025. Both of the latter contests involve allegations that Alphabet has abused its dominance in the ad tech space.
The tech giant’s multiple, major legal battles will likely cause many large investors to sell the shares in the short and medium term. Retail investors should do the same.
On the date of publication, Larry Ramer held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.
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