Tech giant Alphabet (NASDAQ: GOOG) announced its Q2 results for 2022 yesterday after the market close. It reported revenue of $66.69 billion and adjusted earnings of $1.21 per share in the June quarter.
Comparatively, Wall Street forecast sales of $69.99 billion and adjusted earnings of $1.30 per share in Q2. Alphabet's revenue growth decelerated to 13% year-over-year compared to the growth of 62% in the year-ago period.
Despite missing revenue and earnings estimates in the quarter, shares of Alphabet are trading 3.9% higher in pre-market at the time of writing. So let's see what impacted Alphabet's revenue and profit margins in Q2.
In an interview with CNBC, CFO Ruth Porat emphasized that a strong U.S. dollar negatively impacted revenue by 3.7 percentage points in the quarter. Porat also warned the impact of currency fluctuations would accelerate in Q3 of 2022.
Due to an uncertain economic environment, ad sales rose 12% to $56.3 billion in Q2. Enterprise ad spending was subdued due to rising interest rates and inflationary pressures. As a result, YouTube's sales were up just 5% at $7.34 billion, below estimates of $7.52 billion. In Q2 of 2021, YouTube revenue soared by a staggering 84% year-over-year.
Further, Google Cloud sales were reported at $6.28 billion, compared to estimates of $6.41 billion. The cloud division also lost $858 million in Q3 as Alphabet aims to gain market share from Amazon and Microsoft in this segment. Google Cloud sales were up 35.6% compared to revenue of $4.63 billion in Q2 of 2021. But Microsoft's cloud sales surged by 40% in the June quarter.
Alphabet CEO Sundar Pichai explained the company's performance in Q2 was driven by verticals such as search and cloud. He stated,
"The investments we've made over the years in AI and computing are helping to make our services particularly valuable for consumers, and highly effective for businesses of all sizes. As we sharpen our focus, we'll continue to invest responsibly in deep computer science for the long-term."
Similar to most other growth stocks, Alphabet is also wrestling with lower enterprise spending in 2022. The prospect of a global recession is expected to hurt revenue growth for Alphabet and other digital ad companies such as Snapchat, Meta, and Twitter in the next few quarters.
Further, the rising cost of debt and higher employee expenses will likely lower future profit margins. Alphabet's operating profit fell to 28% in Q2, compared to 31% in the year-ago period.
While analysts expect Alphabet sales to rise 14% year-over-year to $294 billion in 2022, adjusted earnings are forecast to narrow to $5.50 per share, from $5.61 per share in 2021. Given Alphabet's market cap, the stock is valued at 4.7x forward sales and 19x forward earnings, which is quite reasonable.
Alphabet shares are down 30% from all-time highs and trading at a discount of 45% compared to analyst price target estimates.
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