Faltering Cloud Growth Could Hurt Google Profit in Q1

Alphabet Inc.'s (GOOG; GOOGL) revenue likely improved marginally while net income declined in the first quarter, as cloud revenue growth probably fell to the slowest pace since 2016 while clients industry-wide looked to cut costs on the service.

Analyst estimates compiled by Visible Alpha predict Alphabet will post net income of $13.8 billion, down 16% from $16.4 billion a year ago. Earnings per share (EPS) is predicted to be $1.41 compared with $4.41 in the first quarter of 2022. Revenue likely climbed 1% to $68.9 billion. Alphabet will report its first-quarter earnings after markets close on Tuesday.

The pandemic and a shift toward remote work helped fuel an explosion in cloud computing business for Alphabet and cloud-computing rivals Microsoft (MSFT) and Amazon (AMZN). But inflation and rising interest rates have prompted many customers to scale back spending on costly cloud infrastructure and services. All three major cloud service providers reported slower growth in the final quarter of 2022.

Alphabet's cloud revenue growth is forecast at 28% for the first quarter. This would be the slowest rate of growth in about seven years and down from 43.8% in the prior-year quarter. Further, analysts expect Alphabet's advertising revenue—its largest revenue stream—to decline for a second consecutive quarter.

Alphabet, like its Big Tech peers, has undertaken a cost-cutting campaign, unwinding the pandemic hiring spree. The company began mass layoffs in January, cutting 12,000 jobs, or 6% of its global workforce. It also reduced its office space. Alphabet expects to record $2.4 billion to $2.8 billion in related one-time charges in the first quarter.

Bank of America analysts anticipate cost cuts won't positively impact earnings until the second quarter. Nonetheless, they see Alphabet's cloud unit coming closer to breaking even in the first quarter and anticipate concerns that Google is losing market share to Microsoft's AI-enhanced Bing are overblown.

Google downloads have held steady since the end of 2022, suggesting "users may be trying Bing but are not changing their Google download activity," according to BofA analyst, Justin Post.

"We look for a constructive tone on AI integration into search and see Alphabet as a more defensive, self-help stock in the Internet group in 2023 with more relative earnings stability given expense flexibility, healthy margins, and opportunity to support stock with buybacks," says Post.

Alphabet Class C shares are down close to 18% in the last year, compared with a less than 1% drop for the S&P 500 Information Technology Index over the same period.

_{Source: Visible Alpha}