Faltering Cloud Growth Could Hurt Google's Profit in Q1

Alphabet Inc. (GOOG; GOOGL) revenue is expected to improve modestly while net income declined in the first quarter as cloud revenue growth fell to possibly its slowest pace since 2016, while industry-wide customers focused on the service. cut costs.

KEY TAKEAWAYS

• Alphabet expects EPS of $1.41 in the first quarter of 2023, compared to $4.41 in the year-ago quarter.

• Revenue could climb about 1% to $68.9 billion.

• Google Cloud revenue is expected to grow 28% year-over-year, the slowest pace of growth for this business line since 2016. {alertSuccess}

Analysts compiled by Visible Alpha forecast Alphabet's net income to be $13.8 billion, down 16% from $16.4 billion a year ago. Earnings per share (EPS) are forecast at $1.41, compared to $4.41 in the first quarter of 2022. Revenue is expected to increase 1% to $68.9 billion.

Alphabet will report its first-quarter earnings after the market closes on Tuesday.

The pandemic and a shift toward remote work helped cloud computing business explode for Alphabet and cloud-computing rivals Microsoft (MSFT) and Amazon (AMZN).

But inflation and rising interest rates have prompted many customers to reduce spending on expensive cloud infrastructure and services.

All three major cloud service providers reported slow growth in the last quarter of 2022.

Cloud revenue rains down for Big Tech

Cloud business revenue in million USD

Numbers for 1QFY-2023 are estimates from Visible Alpha

Alphabet's cloud revenue growth is projected to be 28% for the first quarter. That would be the slowest rate of growth in nearly seven years and down from 43.8% in the prior-year quarter. In addition, analysts expect Alphabet's advertising revenue—its largest revenue stream—to decline for the second quarter in a row.

Alphabet, like its Big Tech peers, is waging a cost-cutting drive, curtailing the pandemic's 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 estimate that the cost-cutting won't have a positive impact on earnings until the second quarter. Nonetheless, they see Alphabet's cloud unit coming close to breaking even in the first quarter and worry Google is losing market share to Microsoft's AI-enhanced Bing.

Google downloads have remained stable through the end of 2022, according to BofA analyst Justin Post, suggesting "users are trying Bing but not changing their Google download activity."

“We look for a constructive tone on AI integration in search and Internet conglomerate Alphabet in 2023 as a more defensible, self-help stock with greater relative earnings stability coupled with expense flexibility, healthy margins and buybacks.” With is given the opportunity to support the stock,'" says Post.

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

TradingView

	Estimate for Q1 FY 2023	Actual for Q1 FY 2022	Actual for Q1 FY 2021
Earnings Per Share ($)	1.41	4.41	1.41
Revenue ($B)	68.9	68.0	55.3
Cloud Revenue Growth (%)	28.1	43.8	45.7