On Tuesday July 23, in the post-market trading of the U.S. East Coast time, Google released its Q2 2024 financial report. Due to the booming development of cloud business and search engine advertising business, Google's revenue and profit both exceeded expectations in Q2.

However, the stock price reaction after Google's performance was volatile. At the beginning of the performance release, the stock rose nearly 3%. Subsequently, due to lower than expected YouTube advertising revenue and management announcing increased capital expenditures, the market was concerned about the growth of its profit margin, dragging down the stock price. As of press time, Google has fallen more than 3% in pre-market trading.

Cloud service quarterly revenue exceeded $10 billion for the first time, and executives are confident about the prospects of AI.

The financial report shows that Google's Q2 revenue was $84.742 billion, an increase of 14% year-on-year, exceeding analysts' expectations of $84.3 billion; earnings per share were $1.89, an increase of 31% year-on-year, exceeding analysts' expectations of $1.84.

However, the revenue and profit growth rate fell slightly quarter-on-quarter compared to the first quarter. Previously, Q1 Google's various indicators exceeded expectations, with a 15% YoY revenue growth and eps surged 61.5% YoY, showing a very impressive performance.

Looking at the business segments, Google's 'cash cow' advertising business is generally stable, with revenue of $64.616 billion this quarter, higher than the market's expected $64.5 billion, an increase of 11% year-on-year and a slight slowdown quarter-over-quarter. Among them, search and other revenues increased by nearly 14% to $48.509 billion year-on-year, exceeding market expectations. However, advertising revenue from YouTube video platform increased by 13% to $8.663 billion year-on-year, lower than the market's expected $8.9 billion.

Previously, some analysts claimed that due to the sluggish economy in 2022 and the intensifying competition from TikTok, Google's core advertising business had weakened somewhat. However, since the business recorded negative growth in Q4 2022, advertising revenue has been steadily improving.

In addition, the cloud business, which is considered to be Google's next growth engine, stood out, with revenues growing by 29% year-on-year to $10.35 billion, the first quarter of revenue for this business exceeded $10 billion.

Regarding Q2 performance, company executives are confident and also mention the strong support of AI on the company's business. CEO Sundar Pichai stated that the search business maintained a strong momentum, and the cloud business made tremendous progress. 'Our AI plan has driven new growth' he added.

Ruth Porat, Chief Financial Officer who is about to step down, also stated: 'We have indeed seen Google's advantages in AI infrastructure and generative AI solutions provided to cloud clients. There is no doubt that customers will seek our help in expanding their abilities.'

Increased capital expenditures have caused concern for the company's profit margin prospect.

In Q2, Google's capital expenditures were higher than analysts' expectations, reaching $13.2 billion, which is almost double compared to $6.9 billion in the same period last year. Continuous huge capital expenditures have made investors panic.

At the same time, Ruth Porat also stated that she will continue to invest heavily in AI. The increase in capital expenditures will erode the company's Q3 profit margin. In addition, the release of the new generation Pixel phone will also push up expenses. However, it is expected that the company's full-year operating margin in 2024 will still be higher than that in 2023.

Ruth Porat said that Google will invest at least $5 billion in the Waymo project for autonomous driving. However, according to the financial report, Google's bets in other areas are not as strong as expected, including Verily, a life sciences business, and the Waymo autonomous driving business. The operating losses of these businesses exceeded expectations, reaching $1.134 billion.

Even so, executives remain confident in investing in AI. CEO Sundar Pichai emphasized: 'We are in the early stages of a transformative field. In the technology field, when you go through such a transformation, the risk of underinvestment in AI is much higher than that of overinvestment.'

In addition, Google will continue to pay quarterly dividends to increase shareholder returns. In the second quarter, it will pay a dividend of 20 cents per share, worth about $2.5 billion. This part of the dividend will be paid to shareholders registered as of September 9 and will be paid on September 16.

How did Wall Street evaluate the mixed performance?

Regarding this performance, Wall Street's evaluation was relatively flat. Most analysts believe that 'it is not surprising enough.' Jefferies analyst Brent Thill said that this result 'is not as convincing as the first quarter, and the first quarter's performance exceeded expectations', and commented that 'there is no exciting content.'

Ben Reitzes, an analyst at Melius Research, commented:

The reaction to this financial report may be relatively flat due to the comments on the conference call seeming to indicate that the pace of profit margin expansion has slowed down.

Given the recent surge in Alphabet and leading cloud computing companies' capital expenditures, attention should focus on their depreciation expense comments when discussing EPS and gross margin, especially for Mag 7 including Microsoft, Amazon, and Meta.

However, looking forward, Google's valuation still has attractiveness. Since the beginning of this year, Google has risen more than 30% year-to-date, lower than the average annual increase of Mag7 (representing the "Seven Sisters" ETF, which has risen nearly 40% this year). Some analysts pointed out that Google's expected P/E ratio is 21 times, which is at a low level among the "Seven Sisters" of US stocks.$Roundhill Magnificent Seven ETF (MAGS.US)$Wedbush said, "Considering the strong performance of the underlying digital advertising market and the improvement of the monetization capability of artificial intelligence, Google's advertising and cloud computing businesses will continue to be supported. We believe that the current valuation is not high."

After Google's financial results were released, investment banks such as Goldman Sachs and RBC still raised their target prices. Currently, among the 39 Wall Street analysts covering Google, 85% recommend buying, and no analyst has given a sell rating; the average target price is $203.27, which still has about 12% upside from the latest closing price of $181.79.

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