Opinion: Google gives Wall Street what it wants, and the stock shoots higher

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Alphabet Inc. executives are prioritizing share repurchases instead of continuing to spend on new employees and business development during the COVID-19 pandemic, and Wall Street is rewarding Google’s parent company.

Alphabet reported worse-than-expected first-quarter earnings Tuesday, with ad sales dropping more than 10% in March as shelter-in-place orders due to the coronavirus began to take effect in the U.S. and around the world. The second quarter could be just as bad, or even worse, but the company is making a lot of cost cuts to help withstand the downturn.

“As of today, we anticipate that the second quarter will be a difficult one for our advertising business,” Alphabet GOOG, +8.56% GOOGL, +8.55% Chief Financial Officer Ruth Porat told analysts on the company’s conference call. “As we move beyond the crisis, and the global economy normalizes, this should be reflected in our advertising revenues. But it would be premature to comment on timing given all the variables here.”

Alphabet executives, like executives at Netflix Inc. NFLX, +0.79% and Intel Corp. INTC, +4.99%, earlier this month, were loathe to make too many predictions during the ongoing pandemic. But they implied Google will be in good shape for the second half, when reduced hiring and spending on capital expenditures should start showing up on the bottom line, and if ad revenue normalizes.

Porat said she expects a modest decrease in the company’s total capital expenditures in 2020, compared with last year, mostly due to a big reduction in spending on global office facilities and construction. Alphabet is also slowing down its pace of acquiring office buildings and hiring, as it has mentioned in recent weeks.

Alphabet also plans to continue its previously announced stock buyback program. “At the beginning of the year, I indicated that we expected to repurchase shares at a pace at least consistent with the fourth quarter on the remaining authorization, and that remains our view for the second quarter,” Porat said, in response to an analyst question about whether it will continue its buybacks. In contrast, many corporate giants have been suspending buyback programs during the pandemic to conserve cash. The Wall Street Journal reported that 43 companies in the S&P 500 have halted buyback programs as of April 5, and this earnings season, more suspensions could be announced by other tech giants.

Alphabet’s shares were up about 3% in after-hours trading immediately after the report, but jumped to gains of more than 7% as Porat described the company’s cost-cutting measures and the plans to continue the stock-buyback plan.

Alphabet had more good news for investors, beyond spending money on its own stock instead of new employees and business initiatives. While the Google ad and search businesses are experiencing a slowdown — in part because companies are changing their ad strategies to better match what people are buying and searching for during the pandemic — some of Google’s other businesses are in demand.

The cloud business — including its G-Suite of cloud-based office applications and cloud-computing platform — is booming while companies have more workers at home. Revenue in the cloud business was $2.4 billion for the first quarter, up 52%, driven by significant growth in cloud platform revenue and ongoing strong growth at G Suite. In addition, YouTube revenues grew 33%, and significant growth persisted until the end of the quarter.

Those businesses have grown quickly since the last recession that Google weathered, with the cloud business in its infancy in 2008, but other changes are much more noticeable. Continuing the company’s stock buyback program and cutting expenses, especially hiring, is not something that Alphabet’s co-founders Larry Page and Sergey Brin would have likely advocated for in the past.

Page and Brin departed day-to-day operations earlier this year, though. And with Pichai and Porat, who investors will remember came to Google from Morgan Stanley, now running the show in this downturn, they are embarking on tactics that Wall Street wants.

Originally Published on MarketWatch

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