• 2Q23 results were within expectations. 1H23 revenue/PATMI were at 47%/46% of our FY23e forecasts. Earnings growth re-accelerated to 15% YoY after 5 quarters of decline.
• Advertising looks to have bottomed, Ad revenue expanded 3% YoY – first time after 2 consecutive quarters of declines, driven by stronger retail trends.
• Cloud still showing healthy growth of 28% YoY with ramp in both seats and average revenue per seat. Extensive customer interest in AI-related products like Bard/Duet AI.
• We raise our FY23e PATMI by 4%, and our FY24e revenue/PATMI by 3%/9% on greater AI-driven efficiencies and a quicker-than-anticipated recovery in advertising. We maintain BUY with a raised DCF target price of US$144.00 (prev. US$131.00), with a WACC of 7.3% and terminal growth of 3.5%.

The Positives

+ Advertising looks to have bottomed. GOOGL showed some signs of recovery in its advertising business, with US$58bn in ad revenue expanding 3% YoY after 2 consecutive quarters of contractions. Within advertising, Search revenue re-accelerated slightly to 5% YoY (1Q23: 2% YoY) on the back of better retail advertising trends, with revenue from YouTube also accelerating to 4% YoY (1Q23: -3% YoY) after 3 quarters of negative growth – indicating that at the very least we are starting to see some stabilisation in advertising spend. Ad growth is expected to continue accelerating into 2H23e given an increase in advertising activity, and easier comps vs 2H22.

+ Cloud showing healthy growth in the face of moderating consumption. Google Cloud showed resilient growth in the face of slowing cloud consumption trends. Cloud revenue increased 28% YoY to US$8bn with growth in both seats and average revenue per seat. Additionally, Cloud saw extensive customer interest in its AI-related products like Bard and Duet AI. Operating income for the segment was US$395mn (5% operating margin), its 2^nd consecutive quarter of profitability.

+ Earnings grew for the first time in 5 quarters. With re-accelerating topline growth, a sharp reduction in total expenses, and restructuring charges behind them, GOOGL finally posted earnings growth after 5 consecutive quarters of declines. PATMI of US$18.4bn grew 15% YoY, with net margin of 24.6% expanding by 2%/3% YoY/QoQ as a result. As AI drives improvements in efficiency and productivity, we continue to expect margins to improve moving forward – FY23e PATMI is increased by 4%, with net margin of 24.4% (1H23: 23.1%).

The Negative

– Nil.