Alphabet Inc (NASDAQ:GOOGL), commonly recognised as ‘Google’ by many, have made available its financial results for the 3rd quarter, and for the first 9 months of FY2022 ended 30 Sep 2022 late last month (25 Oct 2022.)

This post was originally posted here. The writer, Jun Yuan Lim is a veteran community member and blogger on InvestingNote, with a username known as @ljunyuan and has close to 2100 followers.

Most of us should be very familiar with the company’s range of products and/or service, including the Google Search Engine, Gmail, the operating system of Android phones, video streaming site YouTube, among others.

The company generates its revenue from ads on its platforms, sales of products and/or services (such as apps, in-app purchases, digital content products, and hardware), and subscription-based products such as YouTube Premium and YouTube TV. 

I have invested in the company since 29 Apr 2022 (before the 1-for-20 stock split) with my average price at US$114.00.

Hence, I look forward to studying its quarterly results to check on the ‘health’ of the company to make sure that it continues to remain ‘fundamentally sound.’ 

In this post, you’ll find key aspects about its financial results and debt profile, along with the CEO and CFO’s comments, as well as whether at its current traded price, it is considered to be ‘cheap’/‘expensive’, and my thoughts to share:

Financial Results – Q3 FY2021 vs. Q3 FY2022

My Observations:

• Compared against the q-o-q percentage growth in its gross revenue in the first 2 quarters (at 23.0% in Q1, and 12.6% in Q2), it is slowing signs of slowing down, with the percentage growth in Q3 at just mid-single digit percentage.
• For Q3 FY2022, the 6.1% growth in gross revenue can be attributed to improvements in all of its businesses except for YouTube ads (which fell by 1.9%), and Google Network ads (which dipped by 1.6%) – both as a result of unfavourable effect of foreign currency exchange rates. 
• As a result of a huge percentage increase in cost of sales (by 12.8% due to increases in traffic acquisition costs [or TAC] paid to distribution partners, along with increases in data centre and other operations costs as well as hardware costs), gross profit margin fell by 2.7pp to 54.9%. 
• Net profit fell by 26.5% due to a 39.4% jump in research & development expenses, 25.6% increase in sales & marketing expenses, 10.5% rise in general & administrative expenses as a result of increases in headcount, offset by a 43.7% drop in provision for income taxes. 

Financial Results – 9M FY2021 vs. 9M FY2022

My Observations:

• Alphabet Inc’s y-o-y results is a mixed-bag – with a 13.4% increase in gross revenue (attributed by improvements recorded in all of the company’s business segments) offset by a 16.3% decline in net profit (due to increase in cost of sales [attributable to increases in TAC paid to distribution partners and to Google Network partners, and also from increases in data centre and other operations costs], research & development, sales & marketing, as well as in general & administrative; this is in addition to other expenses incurred [primarily due to changes in gains and losses on equities and securities and performance fees].) 
• Gross and net profit margin saw declines of -1.1pp and -8.0pp compared to last year respectively. 

Cash Flow Statement – 9M FY2021 vs. 9M FY2022

My Observations:

• Cash from operating activities edged up 1.7% from increases in cash received from revenues, partially offset by increases in cash paid for cost of revenues and operating expenses, along with an increase in tax payments driven by the effects of capitalisation and amortisation of R&D expenses beginning in 2022 as required by the ‘2017 Tax Cuts and Jobs Act’, and other working capital.
• While the company is still in a ‘net cash’ position, but it has declined compared to last year, as a result of a 7.3% decline in cash & cash equivalent, coupled with a 2.6% increase in total borrowings.

CEO & CFO’s Comments

CEO Sundar Pichai’s Comments:

“We’re sharpening our focus on a clear set of product and business priorities. Product announcements we’ve made in just the past month alone have shown that very clearly, including significant improvements to both Search and Cloud, powered by AI, and new ways to monetize YouTube Shorts. We are focused on both investing responsibly for the long term and being responsive to the economic environment.”

CFO Ruth Porat’s Comments:

“Our third quarter revenues were $69.1 billion, up 6% versus last year or up 11% on a constant currency basis. Financial results for the third quarter reflect healthy fundamental growth in Search and momentum in Cloud, while affected by foreign exchange. We’re working to realign resources to fuel our highest growth priorities.”

Is Alphabet’s Current Share Price Considered to be ‘Cheap’ / ‘Expensive’?

Closing Thoughts

From the company’s latest q-o-q and y-o-y results, it does seem like the increase in headcount (and hence staff costs) in research & development, sales & marketing, and general & administrative, coupled with a slowdown in revenue growth, led to its net profit weakening – hence its announcement on a hiring freeze of 50% for Q4. Personally, I see it as a good thing as it will definitely help to control costs from spiking further (and further impacting its margins – both gross as well as net profit margins.)  

Looking ahead, I am of the opinion its revenue may continue to slow as companies start to trim ad budget (and ads contribute a big part of the company’s revenue – at 82% for Q3 FY2022, and at 79% for 9M FY2022) to cut cost as a result of a bleak economic outlook ahead. Despite of that, I’m confident of Alphabet’s resuming its growth trajectory when the economy gradually recovers.

With that, I have come to the end of my review of Alphabet’s latest results for the third quarter, as well as for the first 9 months of FY2022. I hope you’ve found the contents presented useful. However, do take note that all the opinions above are purely mine, which I’m sharing for educational purposes only. They do not represent any buy or sell calls for Alphabet’s Shares. As always, please do your own due diligence before you make any investment decisions.

Disclaimer: At the time of writing, I am a shareholder of Alphabet Inc. 

Once again, this article is a guest post and was originally posted on ljunyuan‘s profile on InvestingNote. 

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