Alphabet’s (NASDAQ: GOOG) share price went up 6% after 2Q23 earnings was released. It rode off the back of continued strong cloud revenue growth and robust advertising revenue. This was amidst worries of an advertising market decline amidst the current macroenvironment.
Meta ‘s (NASDAQ: META) share price went up 7% after 2Q23 earnings was released. Meta’s results beat expectations and the company issued a positive guidance for 3Q23 of a rebound in the digital advertising market. This was in spite of higher spending being guided for the Reality Lab segment.
These share price increases are off the back of an already strong year for both company’s share prices as well as for the broader Nasdaq.
Let’s take a look at how these big tech stocks fared in the latest earnings season:
Alphabet’s 2Q23 financial performance
Alphabet’s 2Q23 revenue rose 7.1% YoY and 6.9% QoQ to $74.6 billion from $69.7 billion and $69.8 billion respectively.
Operating income increased 12.3% YoY and 25.4% QoQ to $21.8 billion from $19.5 billion and $17.4 billion from restructuring.
Operating margin was at 29% compared to 28% one year ago and 25% last quarter. While not considered a top performing margin, this uptick marks a significance in the current macroenvironment. This was achieved by higher profitability in Service and Cloud as well as lowered losses in the Other Bets segment, reflecting prudence in investments.
Both key segments saw revenue increased YoY and QoQ.
- Google services’ revenue increased 5.5% YoY and 7.0% QoQ.
- Google Cloud’s revenue increased 28.0% YoY and 7.7% QoQ.
For the fourth straight quarter, Alphabet reported growth in the single digit percentages as it reckoned with a pullback in digital ad spending that reflects concerns about the economy. Analysts don’t expect growth to hit double digit percentages again until the fourth quarter.
Alphabet’s financial results reflect continued resilience in Search, with an acceleration of revenue growth in both Search and YouTube, as well as momentum in Cloud. Margins increased as total acquisition costs increased at a slower rate, no doubt in part due to the lowered number of employees.
Alphabet’s search business remained strong despite concerns about Bing + ChatGPT competition, and its ad revenue is displaying signs of recovery.
Google Network advertising continued to weigh down on the company’s revenue growth year on year, presenting a concerning decline. However, it’s important to note that Google Search and YouTube have shown growth during the same period.
Meta Platform’s 2Q23 financial performance
Revenue increased 11% YoY to $32.0 billion. This was due to a 34% YoY increase on ad impressions offset by a 16% YoY decrease on average price per ad. The decrease in average price per ad has been a persistent negative trend in recent quarters. These trends were seen across all geographies.
Average Revenue per User was up; $10.63 in 2Q23 vs $9.82 in 2Q22. This was still below the $10.86 recorded in 4Q22.
Total costs and expenses were $22.61 billion, an increase of 10% YoY. This includes accrued legal expenses of $1.87 billion and restructuring charges of $780 million in 2Q23. Excluding these one-off expenses, total costs and expenses would have been down 2.5% YoY.
The reality lab segment continues to be a cash burn, recording operating losses to the tune of $3.7 billion for 2Q23 and $15.7 billion in the last twelve months.
Meta’s key user statistics are as follows:
- Family Daily Active People (DAP): 3.07 billion, increase 7% YoY.
- Daily Active Users (DAUs): 2.06 billion, increase 5% YoY.
- Monthly Active Users (MAUs): 3.03 billion, increase 3% YoY.
There were concerns a year ago that Meta and its family of apps may have gone past its peak and has started a perpetual decline as 2.88 billion number of users was a significant percentage of total addressable market. Yet, Meta was still able to grow this figure by 7% to 3.07 billion, which translates to an increase in 190 million DAP!
Meta also disclosed that there is a 7% increase in overall time spent on Facebook and attribute it to better AI driven recommended content, especially from accounts that the user does not follow.
Reels plays exceed 200B per day across Facebook and Instagram and monetization is improving with the annual revenue run rate exceeding $10B up from $3B a year ago.
Meta’s latest app, Threads drew more than 100 million users in its first 3 days. Although there have been a slowdown since, there are also market expectations that Meta will ramp this up at the opportune time.
Net cash position was $35.1 billion with a robust free cash flow of $11 billion in 2Q23.
Meta repurchased $793 million of stock in the second quarter of 2023, leaving $40.91 billion available and authorized for repurchases. While the average price was not disclosed, we observed that the price of Meta’s shares traded between $200 to $300 in 2Q23.
Meta has a track record of generating free cash flow but in our opinion, one weakness is that they have not carried out share repurchases when share prices were more favourable.
Cost management is key for both giants
Despite long term plans underpinning confidence in both companies’ growth trajectory, both Alphabet and Meta have taken actions to reduce its cost base via a reduction in its workforce and/or a reduction in its lease spaces.
Alphabet announced a reduction of 6% of its workforce in January 2023, and are also taking actions to optimize their global office space.
Mark Zuckerberg announced that 2023 was a year of efficiency for Meta. Meta has gone through three rounds of layoffs with more than 21,000 (>20%) employees departing. Similarly, Meta is also reducing its office space.
However, expenses are expected to grow in 2024 due to investments in data centers and product development in artificial intelligence (AR/VR).
Meta also reduced their capital expenditures forecast for 2023 by 10% to about $27 billion to $30 billion. The reduced forecast is due to both cost savings, particularly on non-AI servers, as well as shifts in capital expenditures into 2024 from delays in projects and equipment deliveries rather than a reduction in overall investment plans.
Alphabet and Meta’s earnings give hope for investors
Some say that share price performance after earnings is random and unpredictable, but it is not entirely so. Earnings release serves as a reason for investors to take stock from a fundamental valuation perspective.
Both companies were able to demonstrate improvements to both the top and bottom line in spite of concerns of the macroenvironment affecting ad revenue as well as concerns of Bing/ChatGPT and other social media platforms taking a share. There were minimal negatives, hence share price increased.
Alphabet believes that its continued leadership in AI and excellence in engineering and innovation are driving the next evolution of Search and improving all its services.
Meta provided continued growth in 2Q23 as well as a confident guidance underpinned by Facebook’s increased users, monetization of Reels and the newly launched Threads app.