Alphabet’s Free Cash Flow Faces Pressure in Second Quarter

Image: Alphabet’s shares have performed well so far in 2024.

By Brian Nelson, CFA

Alphabet (GOOG) (GOOGL) reported solid second quarter results July 23 that showed a beat on both the top and bottom lines. Revenue increased 15% in constant currency on a year-over-year basis, while the company’s operating margin advanced approximately 3 percentage points. Operating income surged to $27.4 billion, up 25.5% on a year-over-year basis. Diluted earnings per share increased 31.3%, to $1.89.

Management commentary in the press release was upbeat:

Our strong performance this quarter highlights ongoing strength in Search and momentum in Cloud. We are innovating at every layer of the AI stack. Our longstanding infrastructure leadership and in-house research teams position us well as technology evolves and as we pursue the many opportunities ahead…

…We delivered revenues of $85 billion, up 14% year-on-year driven by Search as well as Cloud, which for the first time exceeded $10 billion in quarterly revenues and $1 billion in operating profit. As we invest to support our highest growth opportunities, we remain committed to creating investment capacity with our ongoing work to durably re-engineer our cost base.

In the second quarter, Google Search and other revenues increased 13.8%, while YouTube ads increased 13%, the latter coming in slightly lower than expectations. Revenue for total Google Services advanced 11.5%, while sales in Google Cloud increased 28.8%, coming in better than expectations. Google Services operating income jumped 26.5% in the quarter on a year-over-year basis, to $29.7 billion.

At the end of the quarter, total cash and cash equivalents totaled $100.7 billion, while long-term debt totaled $13.2 billion. Cash flow from operations fell to $26.6 billion from $28.7 billion in the same period a year ago, while capital spending nearly doubled to $13.2 billion from $6.9 billion in last year’s quarter. Free cash flow dropped to $13.5 billion from $21.8 billion in the same period a year ago. 

All told, Alphabet reported solid second quarter results with strong performance across its operating segments. In the quarter, Google Cloud revenue came in better than expectations, while YouTube ads missed only slightly. Alphabet now pays a dividend, and it continues to aggressively buy back stock. The company’s free cash flow faced pressure in the quarter due to investments to drive innovation, and while this may pressure ROICs in the coming periods, we still like Alphabet as an idea in the Best Ideas Newsletter portfolio.