Alphabet’s (GOOGL) second-quarter earnings report was not as bad as many had feared heading into the release after the closing bell Tuesday. Revenue was a small miss at $69.69 billion compared to the $69.8 billion expected, according to FactSet. To be fair, perhaps, some of the difference can be explained away by the strong U.S. dollar, which represented a 3.7% headwind in the quarter. Adjusted earnings were also light at $1.21 per share compared to the $1.27 expected.

Bottom line

In most cases, a top- and bottom-line miss leads to a negative reaction in the stock price. However, thanks to the low bar heading into earnings and the quarterly advertising revenue beat when many on Wall Street were worried about a miss, investors digested the quarter with a major sigh of relief. That explains why shares were up about 5% in after-hours trading.

We like shares of Alphabet here trading at market's multiple. Be cautious below $100, and the shares can break out further to the upside after the $120 level.

Revenue breakdown

Google Advertising revenue in the second quarter increased 11.5% year over year to $56.29 billion, beating consensus estimates of $55.89 billion.

• Google Search & Other revenue rose 13.5% to $40.69 billion versus $35.85 billion estimated, driven by strong performance in travel and retail.

• YouTube Ads revenue gained 5% to $7.34 billion versus the $7.47 billion expected. While a miss, we were pleased to hear YouTube Shorts have been watched by more than 1.5 billion signed-in users every month and YouTube TV has surpassed 5 million subscribers.

• Google Network revenue rose 8.7% to $8.26 billion versus $8.36 billion expected. Management pointed out that the quarter-on-quarter revenue growth deceleration in both YouTube and Network advertising reflected pullbacks in spend by some advertisers.

Google Other revenue dipped 1% year over year to $6.55 billion in the second quarter, missing estimates of $7.07 billion.

Google Cloud revenue increased 35.6% year over year to $6.28 billion, missing estimates of $6.4 billion.

In Other Bets, which represents some of Alphabet’s “moonshot” projects like the autonomous driving technology company Waymo, revenue was flat year over year at $193 million, below estimates of $324 million.

P&L breakdown

As for profitability, Alphabet reported an operating profit of $19.45 billion in the second quarter, missing the $19.99 billion consensus.

• Google Services made $22.77 billion versus the $23.32 billion expected.

• Google Cloud lost $858 million versus the $755 million expected loss. The Cloud business competes against the Amazon Web Services and Microsoft’s Azure unit, which grew by 40% in the second quarter, a tab slower than expected and slower than last quarter.

• Other Bets were a $1.67 billion loss versus a $1.4 billion loss expected.

• Corporate Costs, unallocated, were recorded as a $773 million loss versus the $562 million loss that was expected.

Other results

Total Traffic Acquisition costs (TAC), were $12.21 billion, a little below the $12.38 billion expected.

Operating Cash Flow came in at $19.42 billion, missing expectations of $24.44 billion. Free Cash Flow came in at $12.59 billion, below the $17.53 billion expected by the Street.

Alphabet spent $15.2 billion on share repurchases in the second quarter. Recall, the company announced a new $70 billion repurchase authorization in April. Alphabet does not pay a dividend.

Capital Expenditures (capex) $6.83 billion versus the $6.97 billion expected.

Outlook Comments

• For the rest of 2022, Alphabet CFO Ruth Porat pointed out that this year’s revenue growth rates in Search, are up against very tough year over year comps but the business continues to post strong result.

• Porat also cited challenges in disaggregating the various factors that have caused a pullback in spend by some advertisers in YouTube and Network.

• Foreign exchange headwinds are expected to increase in the third quarter from the second quarter.

• Consistent with previous its announcement, Alphabet plans to slow the pace of hiring and “sharpen” its focus. The company will continue to invest in cutting edge technological areas like AI, Search, and Cloud. However, it will be doing so in a way that is responsible to the uncertain macro environment.

• Capex is still expected to increase in 2022 versus last year.