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Alphabet finally got the message that investors have had it with wild spending


Alphabet (GOOGL) reported weaker-than-anticipated fourth-quarter results Thursday evening as a combination of foreign exchange headwinds and a slowdown in ad spending continued to plague the company. Total revenue of $76.05 billion represented a year-over-year increase of about 1%, or 7% in constant currency, but missed analysts’ estimates of $76.53 billion, according to Refinitiv. ( Constant currencies help strip out fluctuations in foreign currency to provide a clearer financial picture .) Adjusted earnings-per-share fell more than 30% from a year ago, to $1.05 per share, below the Wall Street consensus estimate of $1.18 per share. Bottom line This wasn’t a great showing from Alphabet, but management’s call with investors reassured us about the path ahead. While the discussion began with all the things the company is doing in artificial intelligence — noting its own language model LaMDA will be released to the public soon for feedback — it quickly shifted to a topic that’s top of mind for investors: cost discipline. The team said it will continue to invest in growth and the future — something we appreciate as long-term investors. But it also plans to employ a “sharpened focus” on building “financially sustainable” and growing businesses across the company. Consider: Management is working to improve the economics of Alphabet’s hardware division (think Pixel smartphones), affirmed that Google Cloud is very much on a path to profitability, and it continues to work on new ways to enhance the monetization of YouTube Shorts. It took a while, but management appears to have gotten the message that we are no longer in a zero-interest-rate environment and investors won’t tolerate growth at any cost — especially when that growth is nearly non-existent due to a difficult operating environment. While the effort to slow operating expense growth is underway, the team said the impact will become more visible in 2024. Despite some concerns about the recent Department of Justice antitrust lawsuit , we are reiterating our 1 rating on the stock based on this clear plan to “re-engineer” the company’s cost structure. We are also comfortable with our $130 price target. Moreover, a change in the useful life of servers and certain network equipment stands to benefit the bottom line as it will reduce the depreciation expense on equipment in service as of the end of FY2022 by about $3.4 billion. This should provide an offset to the known headwinds plaguing the company’s revenue performance (more below). The results Management said that as AI models are refined, it will begin to integrate them into Search. Alphabet is also working on and planning to unveil AI powered tools for developers, creators and partners as well as additional tools to bring AI applications to “businesses an for d organizations of all sizes” At YouTube, the team noted that Shorts is now averaging 50 billion views per day, up from 30 billion in the prior quarter. Additionally, YouTube subscriptions (including Music and Premium) surpassed 80 million (including trailers) and the addition of NFL Sunday Ticket is expected to accelerate subscription growth. Alphabet spent $15.4 billion on share repurchases in the fourth quarter and exited the year with $114 billion in cash, cash equivalents, and marketable securities on the balance sheet. Lastly, we want to note that following an assessment of the useful lives of Alphabet’s servers and network equipment, the team is extending the useful life of servers and certain network equipment to six years. As a result, the depreciation associated with these assets, which is mostly factored into cost of revenues and research and development (R & D) expenses, is expected to decline by about $3.4 billion in FY2023 for assets in service as of the end of FY2022. Though that is a simple accounting change that impacts what is considered a non-cash charge — one we have seen before as companies work to lengthen the lifespan of their hardware via new architectures and software improvements — it does represent a real cost saving as these assets do eventually need to be replaced (requiring a cash outlay) and should help the company reduce expenses. That $3.4 billion decline may not be enough for investors to look past the pullback in advertising spending, but seeing as it accounts for roughly 5% of Alphabet’s projected net income for FY2023, it should provide a decent offset to top-line weakness as analysts revise their full-year earnings estimates. (Jim Cramer’s Charitable Trust is long GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will 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. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Sundar Pichai, CEO of Google Inc. speaks during an event in New Delhi on December 19, 2022.
Sajjad Hussain | AFP | Getty Images


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