Cramer's Investing Club: Alphabet's crazy earnings growth proves once again it's a must own stock

Published Tue, Feb 1 20228:01 PM EST

Alphabet (GOOGL) reported outstanding fourth-quarter financial results after the closing bell Tuesday, and the stock jumped more than 9% in after-hours trading to $3,000 per share. In addition to strong headline figures, the Google parent company bested expectations in the services and cloud businesses, repurchased a record $13.47 billion of stock in the quarter and announced a 20-for-1 stock split effective at the close of business July 15, 2022, pending shareholder approval. Bottom line This was a fantastic report and the growth rates, at this size, are simply incredible. While some may want to nitpick the small miss in YouTube ad revenue, Investing Club members would be better served by focusing on the robust growth seen across every line item (including YouTube), especially Google Cloud, and keeping in mind that these are cash backed, GAAP-based earnings results — some of the highest quality results in the market. Furthermore, while Alphabet is often thought of as a secular growth name — and Wall Street loves to bucket companies into broad categories (think growth vs. value or secular vs. cyclical) — we believe Alphabet to be the perfect representation of "growth at a reasonable price," or GARP, and is benefiting from economic tailwinds. It is the best of all worlds. The secular move toward cloud computing and digitization ensures growth in any economic environment — but when the economy is strong and growing, as it is now, businesses increase investments even further. The number one investment priority across all industries right now and for the foreseeable future is in technology: cyber security, digitization and cloud migration. Moreover, with travel opening up, expectations of consumer demand high, and hopes for supply chain bottlenecks to ease up, businesses are clearly looking to take advantage via an increase advertising spend. Add the current earnings and cash generating power of the core business to the upside potential from Other Bets (call it an embedded call option) and factor in that shares currently trade at (including the after-hours move) less than 27x FY2022 earnings expectations and we believe Alphabet must be considered as a core holding in any portfolio. Consolidated results On the topline, revenue of $75.325 billion (+32% YoY) outpaced the $72.293 billion consensus, while diluted earnings of $30.69 per share breezed past expectations of $27.58 per share. Additionally, operating income benefited from 155bps expansion in operating margin, coming in at $21.885 billion (+39.8% YoY), ahead of the $24.792 billion consensus. On the other hand, total traffic acquisition costs (TAC), came in at $13.427 billion, slightly above the $12.888 billion expected, however, more than acceptable given the strong topline performance. On the cash flow front, Alphabet reported operating cash flow of $24.934 billion and free cash flow (operating cash flow less purchases of property and equipment) of $18.551 billion. Compare this to the reported net income of $20.642 billion and factor in that Alphabet reports on a GAAP basis (with the exception of free cash flow, which is a non-GAAP metric) and it becomes clear just how high quality of report this truly was. Segment results Google advertising revenue of $61.239 billion (32.6% YoY) breezed past the $58.702 billion consensus. Making you the advertising sales: Google Search & other: $43.301 billion (+35.7% YoY) vs $40.996 billion YouTube ads: $8.633 billion (25.4% YoY) vs. 8.88 billion Google Network: $9.305 billion (+25.6% YoY) vs. $8.815 billion Add Google other sales of $8.161 billion (+22.3% YoY), which outpaced the $7.99 billion consensus, to the advertising figure and we get a Google Services total of $69.4 billion (+31.3% YoY), well above expectations of $66.42 billion. Elsewhere, Other Bets revenue of $181 million (-7.7% YoY) was short versus the $209 million expected while Google Cloud revenue of $5.541 billion (+44.6% YoY) came in ahead of the $5.44 billion consensus. Taking a look at profitability, Google Services operating profit of $25.993 billion surpassed the $24.792 billion consensus, while Google Cloud reported an operating loss of $890 million, more than the $650 million loss consensus and Other Bets reported an operating loss of $1.45 billion, greater than the $1.3 billion loss expected. Lastly, Alphabet realized a $1.768 billion loss attributable to corporate and other unallocated costs. Speaking on these dynamics, we are of course happy with the strong Google Services profitability while we find the slightly greater than expected losses in Cloud an Other Bets to be acceptable given the robust growth Alphabet is seeing. On the cloud specifically, Google is currently the No. 3 player behind Amazon 's AWS and Microsoft 's Azure. As a result, we fully expect them to be investing aggressively to close the gap and given the growth we are seeing here believe the aggressive investment to be more than justified — especially considering that most of the 70% increase seen in Alphabet's backlog (which now stands at over $70 billion) can be attributed to Google Cloud. As for Other bets, when a company is generating the type of growth and cash flow that Alphabet is at the scale that the company has achieved, it is only sensible that it invests in other potential growth areas. The most notable graduate of the Other Bets segment is the self-driving company Waymo, and while that is still in the works and not yet fully functional, it has the potential to generate significant revenue in the future. It's perhaps the best example of why we like to see Alphabet continue its research and development in the Other bets segment. Members interested in digging into some of the other projects Alphabet has cooking in the Other bets' "The Moonshot Factory" can check them out here — some of this stuff is straight out of the realm of science fiction. (Jim Cramer's Charitable Trust is long GOOGL, AMZN and MSFT. 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 . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

American multinational technology company Google logo seen at Googleplex, the corporate headquarters complex of Google and its parent company Alphabet Inc.

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Alphabet (GOOGL) reported outstanding fourth-quarter financial results after the closing bell Tuesday, and the stock jumped more than 9% in after-hours trading to $3,000 per share.