Alphabet Q4 2023 – Corporate waffle

Google fails to blow its own trumpet.

• Alphabet reported good results but one tiny miss combined with vague and non-specific answers to easy questions on the conference call gave the market an excuse to take profits on what has been a great run.
• Q4 revenues-exTAC / EPS of $72.3bn / $1.64 were better than forecasts of $71.0bn / $1.59 but the outlook was woolly and vague giving the impression that the company doesn’t really know what 2024 has in store for it.
• Total revenues in 2023 were up 9% with Q4 2023 posting 12% YoY and there has been no sign of any meaningful incursion on its core search market from Bing or generative AI more generally.
• This has been one of the major fears that has plagued Google over the last 12 months and so far, I have seen no sign of it in any of the hard numbers that have been produced for the search market.
• Longtime laggard Google Cloud had a better Q4 23 with revenue growth of 26% YoY, but it remains sub-scale managing to post EBIT margins of just 9%.
• I suspect that this will prove to be broadly in line with AWS which is far larger but behind Microsoft Azure which has great momentum thanks to the AI hype driven by OpenAI and ChatGPT.
• The net result is that 2024 should be a steady year where consensus is forecasting 11% growth in revenues and 16% growth in EPS thanks to the ongoing focus on cost control.
• The real problem was that Google missed Q4 23 forecasts for its Search business with $48.0bn in revenues compared to estimates of $48.2bn and waffled its way through the conference call.
• For example, when thrown the low-ball question about competitive threats to search from generative AI, Google waffled about how people have choice and how the roadmap is strong rather than crushing it by saying there has been no impact and, with our best-in-class AI, we will leave competitors in the dust.
• This hesitancy to get in the face of competition makes Google look weak and undermines the market’s view of what is a leading product underpinned by technology that is just as good as OpenAI’s in my opinion.
• Furthermore, while Google is a strangely run company, it does not have anything like the kind of governance risks that OpenAI does and there is no doubt that Google is here to make money from generative AI.
• On that front, Google said some of the right things, underpinning my view that 2024 is the year where all of the billions spent on training need to result in products that start generating revenues.
• Unfortunately, Google was again fairly vague about what these revenues would be or how they would be generated which gives the wrong impression.
• The problem here is that expectations have been set that generative AI will be a gold mine of explosive revenue growth and massive margins but this is very unlikely to be the reality.
• Instead, what it should be able to do is maintain Google’s steady 8-10% revenue growth for longer than expected as well as shore up its position against competitors.
• This is why Google struggles with giving straight answers to these sorts of questions because it is impossible to define what revenues are from generative AI when it is mostly used to make existing products better.
• However, there is no excuse for missing several good opportunities to blow its own trumpet which combined with the tiny miss is why the market was non-plussed and sent the shares down 6% in after-hours trading.
• This leaves with a stock that trades on around 5x EV/Sales and 22x 2024 PER and will grow earnings at around 16% in 2024 and 14% in 2025.
• This is not unreasonable given the outlook, but one does have to bear in mind that the founders of the company still own the majority of the voting shares raising issues around the fair treatment of minority shareholders.
• Alphabet remains one the most reasonably priced of the big technology companies meaning that if I was going to own any of them, this would probably be it.