There are three parts to the bull case for Alphabet Inc.’s stock, according to Bernstein analyst Mark Shmulik. But the Google parent company’s latest earnings report may have crushed two of them — at least for a while.
Shmulik noted that “optimization” issues at Amazon.com Inc.’s AWS cloud-computing business “have dragged on for 12+ months and weighed heavily on investors.” In his view, it’s “unclear just how widespread GCP optimization efforts are and how far along customers are in the journey,” but the challenges could continue for a few more quarters at least.
“Ramping AI spend , as well an annual $2 billion Sunday Ticket expense means Google needs to structurally re-engineer their cost base just to try to stay in the same place with operating margins in the high 20s,” he wrote. That backdrop offers “little room” for earnings and free-cash-flow expansion, he added.The bull case that remains is an admittedly big one: Google’s advertising business is substantially larger than the cloud business, and it topped expectations in the latest quarter.