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Alphabet (GOOGL) reported better-than-expected first-quarter results after the closing bell on Tuesday, earning higher after-hours trading. We are not surprised that the stock’s reaction is muted. Total revenue of $69.79 billion represented a year-over-year increase of approximately 3%, or 6% in constant currency, and beat analyst estimates of $68.01 billion dollars, according to Refinitiv. (Constant currencies help eliminate foreign currency fluctuations to provide a clearer financial picture.) Adjusted earnings per share (EPS) fell nearly 5% from a year ago to $1.17 , but managed to top the Wall Street consensus estimate of $1.07. Alphabet needed a strong report and that’s exactly what we got as the headlines came with a better than expected operating margin, strong cash flow and lower traffic acquisition costs. to forecasts. A recently announced $70 billion share buyback authorization didn’t hurt either. On the other hand, management said it expects capital spending for the full year to be “slightly higher” compared to 2022, which helped limit stock movement. The Street was looking for investments that were roughly flat compared to a year ago. That said, spending is focused on technical infrastructure investments and will be partly offset by lower office space costs. Given the introduction of generative AI tools like Microsoft-backed OpenAI’s ChatGPT and Alphabet’s Bard, Wall Street can give management some leeway here as long as spending growth stays lower. to the rate of sales growth and that management is delivering on its promise to rationalize costs elsewhere. We are not yet ready to take a victory lap as we believe that further cost rationalization must take place before investor sentiment can truly improve. For this reason, we were pleased to hear management reiterate its commitment to operating more profitably. They said on the call that there were “significant, multi-year efforts underway to create savings.” These efforts include leveraging artificial intelligence to increase automation and productivity, better manage costs with suppliers and vendors, and continue to optimize where and how employees work. However, as we heard last quarter, the real benefits of these initiatives should be felt more in 2024 and beyond. Although we weren’t off to the races after this release, the numbers were strong enough to put a dip in the stock and for sentiment to improve. We believe investors may be willing to look beyond the short-term headwinds of an economic downturn to the more efficient company Alphabet intends to become as we move forward through the year. . Don’t expect the stock to go up right away; short-term upside is capped. As strong as this quarter has been, a number of question marks remain, including costs and the economic backdrop. Additionally, the risk to search market share posed by Microsoft’s revamped Bing ChatGPT-enhanced search engine remains, and the Department of Justice’s antitrust lawsuit are also points of uncertainty. Accordingly, we maintain our 2 rating and reduce our price target on GOOGL to $125 per share from $130, given that there is no need to rush into stocks despite the strong results. Those headwinds mentioned above have yet to show up in some way. We will, of course, be looking for updates on all of these fronts as we believe that in the longer term Alphabet has many opportunities for growth as the uncertainty surrounding these issues diminishes. Before we dig deeper, we should note that due to an update in how management allocates company costs, to a more streamlined methodology, we don’t have precise estimates for segment operating profit results as shown at the bottom of the earnings table above. At a high level, this change seems to have shifted some costs into the services segment and out of the cloud and other bets. As a result, Google Cloud posted its first-ever operating profit, $191 million in the first quarter, something analysts didn’t expect to see until perhaps 2024, at the earliest. However, given the change in cost allocation, this profit should be taken with a grain of salt, at least in terms of the weight that investors will be willing to give it. Segment Sales Digging into quarterly sales, Search posted a better-than-expected first quarter of $40.36 billion, up about 2% from a year ago. Advertising strength was driven by growth in the travel and retail verticals, partially offset by declines in finance, media and entertainment. Although slightly below expectations, Google Cloud Platform (GCP) sales of $7.45 billion continue to show strong momentum, growing 28% in the first quarter from l ‘last year. On the call, management said GCP’s annual deal volume has increased nearly 500% over the past three years, with deals worth more than $250 million increasing by more than 300% during this period. As other cloud providers have told us, GCP customer consumption growth has slowed as customers have sought to better optimize costs in an uncertain macro environment. YouTube, though down to $6.7 billion, saw a 2.6% year-over-year decline lower than that seen in the prior quarter. This confirms the view that the first quarter was the low point, especially with management calling for “signs of stabilization”. YouTube’s quarterly sales were also better than expected. We are also seeing strong growth in subscription revenue. YouTube Shorts, Alphabet’s response to TikTok is “to see strong growth in watch time” and just as importantly, management noted that the monetization of Shorts is “progressing well”. YouTube is also seeing strong momentum on connected TVs, and management highlighted shopping on YouTube as an initiative in its “super early days” in which they see a lot of future potential, noting that more than 100,000 creators, artists and brands have already linked their stores to their YouTube channels in order to increase sales. Capital returns Alphabet returned $14.56 billion to investors through share buybacks in the first quarter, partially offset by $5.28 billion in stock-based compensation. It left the quarter with $115 billion in cash, cash equivalents and marketable securities on the balance sheet. (Jim Cramer’s Charitable Trust is long GOOGL, MSFT. See here for a full stock list.) As a CNBC Investing Club subscriber with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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Alphabet (GOOGL) reported better-than-expected first-quarter results after the closing bell on Tuesday, earning higher after-hours trading. We are not surprised that the stock’s reaction is muted.