A look into earnings reports from Alphabet and Tesla
My most favorite and least favorite Magnificent Seven tech stocks reported earnings after the market close yesterday...
So today, let's take a look. And I'll discuss what I think of both stocks in the aftermath of the earnings reports...
1) I've consistently been bullish on Google, YouTube, and Waymo parent Alphabet (GOOGL) ever since I named it as a core holding in my old firm Empire Financial Research's first newsletter on April 17, 2019.
Since then, through yesterday's close, it's up 207% versus 119% for the S&P 500 Index.
I've been pounding the table on it especially hard in recent months:
- More reason to like Alphabet's stock (June 27)
Alphabet released second-quarter earnings yesterday, so let's dive in... (You can see the full earnings release here and the slide presentation here.)
The company reported $96.4 billion in revenue – up 14% year over year ("YOY") and beating estimates of $94 billion. Google Cloud revenue was $13.6 billion, above estimates of $13.1 billion, representing a robust 32% YOY growth and an acceleration from the 28% growth last quarter.
Total costs and expenses grew in line with revenues at 14%, so the company's operating margin remained at a healthy 32%.
Diluted shares declined 2.4% thanks to $60 billion worth of share repurchases in the past 12 months.
As a result, earnings per share ("EPS") came in at $2.31, up an exceptional 22% YOY and handily exceeding estimates of $2.18.
It's incredible that a company of this size – with trailing-12-month revenue of $371 billion – can keep growing this quickly and this profitably.
Overall, it was a great quarter across multiple metrics. And the stock is responding today, jumping as much as 4% in morning trading.
Here's a Wall Street Journal article with more color on the earnings report, especially how the artificial-intelligence ("AI") boom has both helped and hindered different parts of its business: Google Revenue Soars on AI Boom, and Investors Eye Spending Surge. Excerpt:
Google's results are unique in that its cloud division, which sells computing power in data centers, is a beneficiary of the AI boom, while its search business faces threats from users who are migrating toward AI products such as OpenAI's ChatGPT. Other areas of the company are spending at a fast clip to bring AI tools into its popular products like search and YouTube...
Google has for years been working to cut costs to help fund AI spending. The company at several points this year extended voluntary buyout offers to employees in multiple divisions.
To get ahead in the AI race, Google has been improving the capabilities of its own AI model and chatbot, known as Gemini, and adding AI features to many of its products. In May, it overhauled its classic search engine with the U.S. introduction of "AI Mode," which answers search queries in a chatbot-style conversation with fewer links.
Finally, let's look at Alphabet's valuation...
With the stock opening around $197 this morning and 2025 earnings estimates of $9.94 per share (which will undoubtedly be going up after the company's earnings beat), its price-to-earnings (P/E) multiple is 19.8 times.
That's well below the 22 times to 24 times forward multiple of the S&P 500 today (depending on whose estimates you use).
It makes no sense that one of the greatest businesses of all time trades at a lower multiple than the average large U.S. business.
In addition, Alphabet boasts the lowest P/E multiple among its peer mega-cap tech stocks, as I showed in this chart from my recent presentation at the Value Investing Seminar (included in my July 8 e-mail):
My view today – as it has been for more than six years – is that Alphabet is a great stock for conservative, long-term-oriented investors.
2) On the other hand, for years I've been saying that Tesla's (TSLA) stock is neither a good long nor a good short, which I continue to believe...
But I ramped up my warnings to stay away from the stock in my e-mail two weeks ago, covering the following topics: China is rapidly surpassing the U.S. in electric vehicles; Tesla is 'out of touch' with Chinese consumers' tastes; A new book on Tesla's Robotaxis raises serious safety concerns; Mark Spiegel of Stanphyl Capital is short Tesla stock.
Tesla reported second-quarter earnings after the market close yesterday, and the stock tumbled as much as 10% this morning. (You can read the full shareholder deck here. And here's a story covering earnings from the front page of today's WSJ: Tesla Profit Falls, Hurt by Plunging EV Sales.)
Let's take a closer look at the report and the stock's valuation...
Revenue was $22.5 billion, down 12% YOY. Automotive revenue in particular tumbled 15% due to global vehicle deliveries falling 13%, as well as heavy discounting.
Energy generation and storage revenue, which had previously been an area of growth, also fell by 7%, which was partly offset by a 17% increase in "services and other" revenue.
Meanwhile, gross margin decreased YOY from 18% to 17.2%, while operating expenses declined by 1%. This resulted in operating income declining 42% YOY, as operating margin fell from 6.3% to 4.1%.
Adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA") fell 7% YOY, and adjusted EPS fell 23% to $0.40.
Operating cash flow of $2.5 billion was down 30% and barely exceeded capital expenditures of $2.4 billion. The resulting free cash flow of $146 million was the second lowest since the depths of the pandemic more than five years ago.
Reviewing Tesla's key metrics over the past three years, it's hard to see much overall growth – and the recent trends have been poor. Here are the exact tables from page 21 of the shareholder deck:
On the conference call yesterday, CEO Elon Musk acknowledged the company "probably could have a few rough quarters." But he continued to push the robot and Robotaxi storyline, saying "autonomy is the story."
He believes "half the population of the U.S." will be covered by Tesla's Robotaxis "by the end of the year," which is preposterous, given that the now-primitive, geofenced service only covers only a fraction of Austin, Texas right now.
Turning to valuation, Tesla's stock is extreme by any measure...
With the stock trading around $303 this morning and 3.5 billion diluted shares outstanding, the company has a market cap of roughly $1.07 trillion and, with $30 billion of net cash, an enterprise value ("EV") of $1.04 trillion.
With trailing-12-month revenue of $92.7 billion and adjusted EBITDA of $15.3 billion, it's trading around 11 times EV to revenue and 68 times EV to EBITDA.
And with $1.99 of trailing adjusted EPS, that gives the stock a staggering P/E multiple of around 152 times.
I've said many times that Tesla is a powerful company with open-ended opportunities in some of the world's largest end markets...
As such, I still don't recommend shorting the stock. However, it's also light-years away from a price at which I would consider buying.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.