Cloud Services Success Gives Alphabet a Much-Needed Cushion

One of the biggest threats facing Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) as the novel coronavirus shuts down the global economy is how it would affect ad sales. As the U.S. spirals into a likely depression, GOOG stock would surely suffer.

Cloud Services Success Gives GOOG Stock a Much-Needed Cushion

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So, it was a pleasant surprise for investors that Alphabet disclosed in its recent earnings report that while sales are lower on Google’s massive online advertising platform, the company’s other businesses, such as cloud services, are helping to pick up the slack.

Plus, analysts are buoyed by Google’s plans to reduce spending in key areas to support GOOG stock in the second half of the year.

In all, the earnings report and Alphabet’s plan moving forward gives its stock some solid momentum, making it an attractive growth investment for the time being.

First, let’s review those earnings.

A Review of Alphabet Earnings

Google reported a mixed bag in its Q1 earnings report on April 28. Revenue of $41.16 billion beat analysts’ estimates of $40.38 billion. But earnings per share of $9.87 was less than Wall Street’s expectation of $10.33 per share.

In short, revenue was 13% higher year-over-year, while operating income of $7.98 billion was a 20% increase from the previous year. But EPS fell big, by 17%, from the same quarter a year ago.

Google saw strong ad revenue in January and February before the effects of the coronavirus pandemic struck in March, sending ad revenues lower, CFO Ruth Porat told analysts after the earnings report was released.

“Our results for the first quarter are a tale of two quarters with strong results across our revenue lines for January and February followed by an abrupt decline in March in our advertising revenues as governments globally instituted stay-at-home orders in response to COVID-19. At the same time, even through March, our non-advertising revenue lines maintained their strong performance particularly Google Cloud.”

Google Is Better Positioned Now than in 2008

This isn’t the first time that Google faced a recession — it was also in this spot in the Great Recession of 2008-09, when the collapse of the subprime housing market sent the S&P 500 index down nearly 40% in a single year.

Google (that’s what the company was called then, as the parent company Alphabet wasn’t formed until 2015), saw ad sales stuck in single-digit growth for five consecutive quarters. Google’s revenue estimates also fell at least 15% in 2009 and 2010.

But Google — or should I say, Alphabet — is a different company now. It’s more diversified and better prepared to withstand a recession now.

For one thing, Google’s Cloud business gives it a huge boost right now. Cloud services raked in $2.8 billion, which was a 52% increase from the same quarter a year ago.

Other revenues, such as hardware and Google Play purchases, were $4.44 billion for the quarter, which was an increase of 23% year-over-year.

And moving ahead, Google’s expanded product lines are seeing heavy usage during the coronavirus pandemic. Google says it now has more than 6 million paying G Suite subscribers, up from 5 million a year ago.

Many schools have issued Google Chromebooks to students who are now attending virtual classes from home. And Google says the number of students and teachers using its Google Classroom platform doubled since March, to 100 million.

The Google Meet platform is also seeing more usage with more than 100 million daily Meet meeting participants. Google is making Google Meet available for free, with no time limits. Users in today’s work-from-home culture see Meet as a viable alternative to using Zoom’s (NASDAQ:ZM) service, which has been plagued with security concerns this year.

“We remain optimistic about the underlying strength of our business over the long-term,” Porat told analysts. “On a daily basis, our products play an important role for consumers and businesses globally.”

Investors obviously agree. GOOG stock was up 3% after the company reported earnings, and then shot up 7% in after-hours trading as investors digested the analyst call.

That’s helped Google get back into the black so far this year — the stock is up about 1% year to date.

The Bottom Line for GOOG Stock

I’m not saying everything is rosy with Google right now. Advertising sales will be somewhat depressed as long as the economy is spiraling down and businesses remain closed. Google is planning to limit hiring this year in an effort to keep costs down.

But the company’s diverse business lines — in particular, its Cloud growth — provide a necessary cushion to insulate GOOG stock from the suffering that investors had during the Great Recession.

The stock has an ‘A’ quantitative grade in my Portfolio Grader right now and gets a ‘B’ overall grade.

Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.

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