Alphabet Inc._ Capex, Cloud, & Costs the Culprits, But Solid Ad Growth in Search & YouTube; Lowering Estimates Slightly, But Remain Positive on AI Innovations & Ads; Remain Overweight w_$220 PT. Wed Feb 05 2025

Summary of Alphabet Inc. Conference Call Company Overview - Company: Alphabet Inc. - Date: February 5, 2025 - Analyst: Doug Anmuth, J.P. Morgan Key Points Financial Performance - 4Q Results: Alphabet's revenue increased by 12% (FXHN) with operating income margin at 32.1%, slightly below expectations [2][8] - Search & YouTube Growth: Search revenue grew approximately 13% (FXHN), and YouTube revenue increased by over 14% (FXHN), both in line with estimates [2][8] - Network Revenue Decline: Network revenue decreased by 4% year-over-year, contributing to the overall revenue shortfall [2][8] Capital Expenditure (Capex) - 2025 Capex Guidance: Google anticipates a significant capex increase to approximately $75 billion, a 43% rise following a 63% increase in 2024 [2][3] - Investment Focus: Capex will primarily be allocated to AI infrastructure, including servers, data centers, and networking equipment [2][3] Cloud Business - Cloud Revenue Growth: Google Cloud revenue grew by 30% to nearly $12 billion in 4Q, but this was 2% below estimates [2][7] - Capacity Constraints: Google Cloud is experiencing capacity constraints, with demand exceeding supply, which is expected to ease as more capacity comes online [2][7] Cost and Margin Outlook - Operating Margin: The operating income margin for 4Q was 32.1%, reflecting a year-over-year expansion of 465 basis points [2][7] - Depreciation Impact: Costs are expected to rise due to accelerated depreciation, projected to grow by 60% in 2025 [2][7] - Margin Expansion Expectations: Despite cost pressures, a modest margin expansion of 50 basis points is anticipated for 2025 [2][7] Market Sentiment and Comparisons - Stock Reaction: Google shares fell over 7% following the 4Q results due to concerns over heavy infrastructure investment and lower revenue growth expectations [2][3] - Comparison with Meta: The market's reaction to Google's capex contrasts with Meta's 60%+ capex increase, attributed to perceived returns on AI investments being more evident in Meta's advertising business [2][3] Future Projections - Revenue and Income Estimates: 2025 revenue estimates for Alphabet have been adjusted down by less than 1%, while operating income estimates have decreased by 2% primarily due to higher depreciation [2][9] - Price Target: The price target for GOOGL shares is set at $220 for December 2025, based on a valuation of approximately 22 times the estimated GAAP EPS of $10.03 for 2026 [2][5] Additional Insights - Advertising Growth: Solid advertising growth was noted, particularly in financial services and retail sectors, contributing to the overall positive sentiment despite the challenges [2][7] - AI Innovations: Continued investment in AI is viewed positively, with expectations that AI Overviews are monetizing similarly to traditional search [2][3] This summary encapsulates the key insights from the conference call regarding Alphabet Inc.'s financial performance, strategic investments, and market outlook.