‘TikTok is clearly taking some share’ from YouTube, analyst says

Angelo Zino, CFRA Research Senior Equity Analyst, sits down with Yahoo Finance Live to break down Google parent company Alphabet's Q1 earnings miss, Google's revenue growth, cloud division losses, and video content competition with social media platform TikTok.

Video Transcript

- Switching back to results from Alphabet, the Google parent company. They are seeing shares move lower by about 4.4% here in after hours trading. We're going to take another look at the actuals versus the estimates where we did see slight misses on the extac number. And then, additionally, we're keeping close tabs on the EPS comparisons as well. We'll have those for you in a hot second.

Continuing to break this down, though, let's bring in Angelo Zino, who is the CFRA research analyst-- senior equity analyst, I should say, over at CFRA. Angelo, great to speak with you as always here. First, your headline takeaway from this quarter for Alphabet?

ANGELO ZINO: As far as the quarter is concerned, listen, I don't think it was that bad, or as bad as kind of the stock is making it seem like. I mean, listen, the stock was kind of going down into the numbers clearly. But at the end of the day, I mean, the top line pretty much kind of met our expectation at about 23% growth, I'd say.

Again, for us, it was all about search, the cloud, and YouTube. On the search side of things, grew about 24%, essentially near our view. The cloud side of things, actually better than expected, grew about 44%. The disappointment here looks like it was more on the YouTube side of things. That was a clear mess. Up only 14%. Actually, it was a pretty notable miss relative to what we were looking at.

So I'd say that probably that the reason you're seeing the decline in the stock here has to do with what we saw out of the YouTube numbers. And then, listen, the company announced a $70 billion buy back here. And that's one of the positives, one of the reasons we do like Alphabet here. It's because of that free cash flow potential and their stockpile of cash on the side.

- What would you like to hear from company management with regard to YouTube, as you were laying out, going up against competition from new platforms like TikTok?

ANGELO ZINO: Yeah. And, I mean, definitely want to hear about what they have to say regarding the competition. And I do think TikTok clearly is taking some share here within the broader market. A similar fate that Meta is probably seeing or has been seeing on their end. I also think the Russia-Ukraine issue is clearly impacting the YouTube numbers here.

So I do want to see what they have to say in terms of the commentary for Q2 and the rest of the year on the YouTube side of things. The hope is, at least on my end, is you do see an acceleration of growth here from that number that we just saw out of Q1. So that's what we're hoping for.

- Is the growth sustainable on the cloud side? You were mentioning that a moment ago. I mean, when we look at the comparisons, cloud revenue actual, that came in at $5.82 billion versus the estimate. We were looking for about $5.77 billion there.

ANGELO ZINO: Yeah. So, listen, the numbers are going to decelerate as we kind of go through 2022 into 2023. Our view is on the cloud side of things, they could grow the top line on the cloud north of 30% here well through 2023. And then we'll see what happens thereafter. But we're looking at 30%-plus growth here in each of the next two years.

Also, the other side of this is they're investing aggressively on the cloud. And that's clearly having an impact in terms of the free cash flow numbers as well as the higher expenses and kind of the margin compression we're seeing, not only in that segment, but on the broader business.

- Do you expect an acquisition to be part of that spending, particularly when we've continued to track some of the ERP and cloud landscape companies that's acquired a growth strategy has remained intact over the years?

ANGELO ZINO: Yeah. I mean, we'll see. I mean, as far as Alphabet is concerned, it'll be interesting to kind of see how aggressive they kind of get on the cybersecurity side of things in terms of investments there. That's an area that I think they could continue to look to aggressively spend. But, listen, as far as what we're seeing also I'd say on the OpEx side of things, we think in the first half of this year especially, OpEx is going to outgrow sales growth.

And it's just a massive investment year overall, not only for Alphabet, but for most of the big tech names. We start to see that we think ease as we kind of go through into the calendar year and then into 2023. So hopefully some of the inflationary pressures, or at least on the wage inflation side of things, start to abate. But it's extremely expensive right now to retain and hire new talent, specifically in Silicon Valley.

- Traffic acquisition costs. I mean, it's hard not to have a conversation about that. That rose year over year by about 23%. What do you make of that?

ANGELO ZINO: Yeah. I mean, I think that was relatively around where expectations were. So it's not necessarily a surprise on our end. But yeah. I mean, definitely something to monitor here.

- All right. Angelo, we got to leave things there here on the afternoon. As we're moving forward here, we'll continue to keep an eye on shares of GOOGL. Always appreciate the conversation, Angelo.