Current Price: $2,342 Price Target: $3,450
Position Size: 4.8% TTM Performance: -1%
Key Takeaways:
- Robust revenue growth and steady impressive margins, but saw weaker than expected ad revenue from YouTube.
- Overall, strong ad revenue continues…retail and travel-related ad spending were among the strongest sectors. Overall, ad related revenue up 23% w/ “Search & Other” revenue ($40B, up 24%), Google Network ($8.2B up 21%) and YouTube ad sales ($6.9B, up +15% YoY).
- YouTube weakness – management attributes the YouTube weakness essentially to two things: weakness in Europe, impacted by Russia/Ukraine and an increased mix of viewership of YouTube shorts (their TikTok rival product) which they don’t monetize as well as longer format videos….yet.
- Google Cloud Platform (Azure & AWS competitor) continues to do well, +44%.
- Investing behind growth as they ramp spending on Capex and headcount – continuing to pick up the pace of investment in office facilities and data centers. They recently announced plans to invest $9.5 billion in US offices and data centers, creating at least 12,000 new jobs in places like New York and Atlanta.
- Valuation –The stock reasonably valued, trading at a 5% FCF yield on 2022, cheaper than the S&P at ~4.5% and growing top line and FCF/share double digits w/ margins more than 2x the S&P. Additionally, they have almost 7% of their market cap in net cash ($106B) after generating $69B in FCF in the last 12 mos. They have been stepping up their pace of buybacks lately. They repurchased $50B in shares in 2021. And announced a $70B buyback this quarter which should support the stock. Also a 20-for-1 stock split to go into effect on 7/15.
Quote from the call on the War in Europe …
- “about 1% of Google revenues were from Russia in 2021, and that was primarily from advertising. In addition, from the outset of the war, there was a pull-back in advertiser spend, particularly on YouTube in Europe. So a couple of impacts from the war.”
More on YouTube…
- YouTube has lots of opportunity ahead despite slowing this Q in Europe and higher penetration of YouTube shorts (strong engagement but weak monetization so far).
- Positioned to capture the shift in advertising away from linear TV & strong value proposition to advertisers
- YouTube presents a great opportunity to address commercial intent w/ video in a more measurable way than linear TV
- “YouTube’s reach is becoming increasingly incremental to TV”
- YouTube helps advertisers reach audiences they can’t reach anywhere else (especially younger audiences) and helping brands do it more efficiently
- According to Nielsen, in the US, YouTube accounts for over 50% of ad supported streaming watch time on Connected TVs among people ages 18 and up. And over 35% of viewers in this group can’t be reached by any other ad supported streaming service.
- E-commerce potential: They are still in the early innings w/ e-commerce potential w/ YouTube. Possibilities include: shoppable livestream events w/ large retailers or letting viewers buy directly from their favorite creators’ videos.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109