According to Wedbush analyst Dan Ives, Alphabet Inc., the parent company of Google, reported fourth-quarter results that may be positive indicators for Amazon.com Inc. and Meta Platforms Inc., both of which are set to report their own results this week.
Ives stated that the performance of Google Search and YouTube suggests a healthy digital advertising environment, which aligns with market expectations. Google Search revenue grew by 12.7%, in line with estimates, while YouTube ads revenue increased by 15.5%, exceeding expectations. As a result, Wedbush has maintained its outperform rating and $160 price target for Alphabet.
Nevertheless, Alphabet’s stock fell by 5.6% in premarket trades on Wednesday, and both Amazon and Meta also experienced declines. This reaction from investors may make them more cautious about investing in these companies, warns J.P. Morgan analyst Doug Anmuth.
However, Anmuth believes that Alphabet’s Google Cloud results are promising for Amazon Web Services, as they indicate positive revenue contributions from AI optimization. On the other hand, he is less certain about the impact on Meta’s digital advertising. Despite potential limitations from Google, Anmuth still expects Meta to surpass revenue guidance in the fourth quarter.
Overall, Google’s fourth-quarter results suggest hopeful possibilities for both Amazon and Meta, although caution is advised due to share price reactions.
Google Cloud’s Fourth-Quarter Revenue Growth
Google Cloud’s fourth-quarter revenue grew by an impressive 25.7% compared to the same period last year. However, Melius Research analyst Ben Reitzes believes that the company’s margins are overshadowing this positive performance, especially when compared to its rival, Microsoft Corp.
Gap in Margins
Although the rebound in Google Cloud (GCP) is a welcome sight, Reitzes suggests that it might take some time for Google’s commitment to efficiency to pay off. He points out that the overall operating margins of 27.5% fell below the consensus of 27.9% and experienced a decline of 30 basis points from the previous quarter. In comparison, Microsoft boasts margins that are 16 percentage points higher.
Microsoft’s Success
Reitzes acknowledges that Microsoft not only managed to beat margins but also outperformed in the cloud and AI sectors during their fiscal second-quarter results. According to Reitzes, Google needs to demonstrate a stronger focus on margins if it intends to compete with Microsoft, Meta, Amazon, and even Apple in terms of market cap. While three of these companies are yet to report their fourth-quarter results, they have all shown recent upside, partially due to positive margin performance.
Stock Performance
In the past 52 weeks, Alphabet shares have risen by 50.8%, closely trailing behind Amazon’s gain of 51.2% and Meta’s impressive gain of 161.3%. Meanwhile, Microsoft shares have experienced a rise of 61.7% during the same period. Apple’s stock has gained 29.3%, while the S&P 500 index has grown by 19.6%.
Note: Apple will be reporting its fiscal first-quarter results on Thursday.