Morning Note: Market news and positive updates from Alphabet and Reckitt Benckiser.
Market News
A gauge of the world’s stocks hit a new record, helped by a 1% gain in Asia, on signs the US is nearing more trade deals. Trump said partners will face tariff rates between 15% and 50%. EU diplomats see progress toward a deal that would set a 15% levy for most products. The UK and India are set to sign a free trade agreement. The dollar retreated after Howard Lutnick said Jerome Powell “has got to go.” Gold slipped back to $3,375 an ounce.
Alphabet (see below) gained as sales beat, and the firm boosted its capex target to $85bn to keep up in the AI race. Tesla slid postmarket after Elon Musk warned of a few “rough quarters” ahead as the EV tax credit in the US disappears. Second-quarter revenue fell 12%, the sharpest drop in at least a decade, and free cash flow plummeted.
The FTSE 100 is currently 0.5% higher at 9,112, while Sterling trades at $1.3560 and €1.1530.
European metals traders are scrambling to secure rare-earth metal supplies after China cut off exports, with traders turning to the secondary market. Brent Crude trades at $68.50 a barrel.
Europe car sales fell the most in 10 months, dropping 5.1% to 1.24m vehicles in June. The region’s automakers are facing mounting Chinese competition, and for those with US operations, billions of euros’ worth of earnings are at risk from Trump’s tariffs.
Source: Bloomberg
Company News
Last night, Alphabet released second quarter results which were better than market expectations driven by a strong performance across the board. The company also announced plans to increase its 2025 capital investment from $75bn to $85bn to meet strong demand for cloud products and services. On an upbeat call following the results, the company outlined a raft of examples highlighting how AI is positively impacting its customer base and all aspects of the business. The shares had a good run into the results but still pushed on a further 2% in after-hours trading following last night’s results.
Alphabet is the public holding company for Google, one of the world’s most recognised and widely used brands. In addition to the core search engine, the group owns digital video platform YouTube, Google Cloud, web browser Chrome, mobile operating system Android, Gmail, Google Maps, AI personal assistant Gemini, Fitbit, autonomous driving company Waymo, drone delivery company Wing, among others.
The group has a strong track record of innovation, leaving it well placed to capitalise on a wide variety of technological themes, such as digital media, e-commerce, video advertising, the cloud, the internet of things, driverless cars, and AI.
The company has seven products with more than two billion users each and another eight with more than 500m users, most of which we believe are far from being fully monetised. The group’s structure allows it to own a portfolio of businesses with different time horizons, while its broad offering provides customer stickiness and a competitive edge. Capital allocation is spread across internal R&D, accretive M&A, and massive shareholder returns.
AI remains a hot topic. We believe Alphabet is well placed – the company has been incorporating AI functionality into its search capabilities and other products for years and is expected to launch a steady stream of innovation in the future. Google’s position in cloud services – it is one of the big three public providers, generating more than $50bn in annual revenue – leaves it well placed to provide the infrastructure and computing power needed by AI. A further competitive advantage comes from having the most robust personalised data and user histories from its scaled applications: YouTube, Maps, Gmail, Calendar, and traditional Search. Google is navigating the shift to AI Search and continues to advance its AI driven capabilities, making the experience more intelligent, agentic, and personalised. The integration of Gemini, Google’s answer to ChatGPT, into AI Overviews (which itself has scaled to 2bn monthly users) allows users to submit longer and more complex search queries for new use cases.
Furthermore, the company’s recent I/O development event showcased several innovative devices, tools, and features, many of which are designed to make AI more helpful.
Political and regulatory headwinds remain elevated. Most important is the ongoing DOJ anti-trust Search lawsuit for which a ruling on remedies is expected in August. In addition to a fine, there are a number of potential behavioural remedies including the forced sale of the group’s Chrome browser or a ban on making payments to third parties to make Google the default general search engine in their products. Whatever the outcome, Google is likely to appeal, so that in the absence of a settlement, it is likely to be several years before any remedies take effect. Overall, we believe the current valuation of the shares already discounts many of the less favourable outcomes, albeit not the worst-case scenario.
Back to last night’s results. In the three months to 30 June 2025, revenue grew by 13% on a constant currency basis to $96.4bn, versus the consensus forecast of $93.9bn. This compares to the 14% growth rate in the previous quarter and 11% expected by the market. The performance reflected robust growth across the company with AI positively impacting every part of the business.
The group reports its results across three segments: Google Services, Google Cloud, and Other Bets. Google Services is the largest division (86% of revenue), generating revenue primarily from digital advertising and the sale of apps, digital content products, hardware, and YouTube subscription fees. During Q2, Google Services revenue grew by 12% to $82.5bn, reflecting strong growth across all product areas.
Google Search (which accounts for 76% of ad revenue) increased by 12%, faster than the 10% last quarter. Advertising from Google Network Members’ websites (10% of ad revenue) fell by 1%. The group separates out YouTube, which accounted for 14% of ad revenue in the quarter and grew by 13%. According to ratings firm Nielsen, YouTube now accounts for more than an eighth of all television usage in the US.
Other sales within the Services division (known as Google Subscriptions, Platforms, and Devices) include Play, content products, hardware, service, licensing fees, Nest, and YouTube’s non-advertising revenue. They grew by 20% in Q2 to $11.2bn.
Traffic acquisition costs (TAC) are the fees Google pays to other companies (such as Apple) to carry its search service and adverts (i.e., cost of sales). During Q2 they grew by 10% and currently account for 20.6% of advertising revenue.
Google Cloud includes Google’s infrastructure and data analytics platforms, collaboration tools, and other services for enterprise customers. In Q2, the division grew by 32% to $13.6bn. This was better than the market forecast of 26% and an acceleration from the 28% growth in the previous quarter. The supply-demand balance remains tight – the backlog is $106bn – and the group continues to invest to grow the business. Despite this, Cloud quarterly profit grew from $1,172m to $2,826m, with a margin of 20.7%.
The group’s Other Bets division (less than 1% of revenue), which is effectively an incubator fund for new products and technologies, made a quarterly loss of $1,246m, 10% higher than last year. The group continues to wind down non-priority projects.
Alphabet continues to ‘durably engineer’ its cost base to support its investment in long-term growth opportunities, most importantly AI. The number of employees rose by only 4% in the quarter to 187k, while actions are being taken to optimise global office space and use AI to increase business productivity and efficiency. The group has previously highlighted that 25% of new code is being written by AI. The company reiterated its warning that the ramp up in capital investment (see below) is now feeding through to higher depreciation, which rose by 35% in Q2.
In the latest quarter, ongoing efforts to improve efficiency helped deliver margins in line with last year at 32.4% despite the impact of a $1.4bn legal settlement. EPS grew by 22% in the quarter to $2.31, versus the consensus forecast of $2.18.
As expected, capital expenditure rose sharply, 70% to $22.4bn in the quarter, as the company continued to pour money into AI products. The company is confident about the opportunities ahead, and to accelerate its progress, it has further raised its capital expenditure target in 2025 from $75bn to $85bn. There is some concern regarding the level of spend on AI and the potential return on investment. The company highlighted that demand continued to exceed supply, justifying the ramp-up in investment. We also note the group has a strong track record for generating returns – together, Cloud and YouTube (two businesses developed from scratch) exited 2024 at an annual revenue run rate of $110bn.
Free cash flow generation was strong ($5.3bn in the quarter), despite ongoing spend on R&D and capex, while the group’s huge cash pile (including marketable securities and long-term debt) stands at $71.5bn. This has allowed the company to significantly increase its returns to shareholders. During the latest quarter, the company bought back $13.6bn of its shares, and in April the Board authorised the repurchase of up to an additional $70bn of shares. The company also pays quarterly cash dividends, putting the company on an equal footing with Microsoft and Apple in the minds of investors looking for yield.
Looking forward, although the regulatory outlook will remain a headwind in the near term, the shares continue to trade on a valuation (18x ex-cash) below most of the other tech majors and at a level we believe is very attractive for a company exposed to several areas of long-term secular growth.
Source: Bloomberg
Reckitt Benckiser has today released first-half results which were slightly better than market expectations. The group’s Fuel for Growth programme is delivering ahead of plan and a new share buyback programme has been initiated. Guidance for the full year has been nudged up. In response to today’s update, the shares have been marked up by 8% in early trading.
Reckitt is a global leader in health, hygiene, and nutrition. Trusted brands, such as Dettol and Lysol, continue to benefit from the shift to healthier and more hygienic lifestyles, particularly in emerging markets. To help ease the pressure on state-funded healthcare systems, we are seeing a transition to self-care and growth of over the counter (OTC) brands such as Mucinex, Nurofen, and Gaviscon, all of which are owned by Reckitt. A focus on immunity, mental health, and overall well-being is expected to drive growth of the group’s preventative treatments, such as vitamins, minerals, and supplements (VMS).
Reckitt is currently sharpening its portfolio focus and simplifying its organisation to drive accelerated growth and value creation. A new operating model and structure went live on 1 January 2025.
· Core Reckitt (72% of revenue) includes a portfolio of 11 market-leading (No.1 or No.2), high margin Powerbrands across four categories of self-care, germ protection, household care, and intimate wellness. Brands include Mucinex, Strepsils, Gaviscon, Nurofen, Lysol, Dettol, Harpic, Finish, Vanish, Durex, and Veet. Over the last three years this portfolio has delivered a 5% net revenue CAGR and in 2024 generated a gross margin above 60%.
· Essential Home (13% of revenue) includes a portfolio of non-core brands such as Air Wick, Mortein, Calgon, and Cillit Bang which the company is in the process of selling (see below).
· Mead Johnson Nutrition (15% of revenue). The company is ‘evaluating opportunities’ for the business which includes infant formula brands Enfamil and Nutramigen.
Reckitt operates across three geographies: North America, Europe, and Emerging Markets. It has also expanded and accelerated its existing fixed cost optimisation initiative to unlock efficiencies and deliver at least a three percentage points reduction in fixed costs by the end of 2027.
From 2026, management believes it will have the portfolio, geographic footprint, and execution capabilities for Core Reckitt to consistently deliver 4%-5% like-for-like (LFL) net revenue growth, while consistently delivering annual EPS growth and creating value for shareholders.
Last week, Reckitt announced an agreement to sell its Essential Home business. The $4.8bn transaction is fairly complex – it includes up to $1.3bn of contingent and deferred consideration and Reckitt will retain 30% of the business. Excess capital will be returned to shareholders, with around $2.2bn expected to be paid out as a special dividend, which will be in addition to Reckitt’s ongoing share buyback programme (see below).
Back to today’s results. In the first half of 2025, reported revenue fell by 2.6% to £6,981m. Stripping out the impact of currency (-4.1%) and M&A, LFL growth was 1.5%. Growth was driven by price/mix (+2.6%) which offset the small volume decline (-1.1%). As expected, growth accelerated slightly in Q2 (+1.9%) versus Q1 (+1.1%), driven by a sequential improvement in volume.
Core Reckitt grew by 4.2%, made up of 3.0% growth in price/mix and 1.2% volume growth. Growth accelerated Q2 (+5.3%) versus Q1 (+3.1%) and was above the full-year target run rate of 3%-4%, hence the guidance upgrade (see below). The company enjoyed a continued improvement in market competitiveness – 59% of the top Category Market Units held or gained share in the core Hygiene and Health business.
By product segment, growth was driven by the Germ Protection (+8%) and Intimate Wellness (+14%) because of improved market execution and market share gains. Performance was weaker in Household Care (+2%) and down in Self-Care (-2%), although both returned to LFL growth in Q2.
Growth was led by Emerging Markets (+12.8%), more than offsetting small declines in Europe (-0.9%) and North America (-1.7%). This was despite a challenging consumer environment and Mucinex sinus reformulation shelf reset.
Both of the smaller non-core divisions were expected to suffer LFL declines in H1. In the Essential Home division, net revenue fell 6.5% on a LFL basis, with volume down 5.1% and price/mix of 1.4%. In Mead Johnson Nutrition, net revenue declined 3.3% on a LFL basis, with volume down 7.3% and price/mix up 4.0%. The business continues to recover following the supply disruption caused by the Mount Vernon tornado in the second half of 2024, which impacted on-shelf availability.
At the group level, the adjusted gross margin rose by 40 basis points to 61.0%, driven by continued productivity efficiencies, greater prominence of the Powerbrands, and a more stabilised input cost environment. The group’s Fuel for Growth programme is delivering ahead of plan, with a 190bps reduction in fixed costs vs H1 2024 to 20.0% of net revenue. As a result, adjusted operating margin rose by 110 basis points to 24.6% in the first half. Adjusted EPS rose by 4.4% to 168.4p, boosted by the lower share count from ongoing share buyback (see below) and a lower tax rate.
Free cash flow generation was £623m, down 24%, albeit including a £201m of one-off cash cost relating to transformation and restructuring. Financial gearing ended the half-year at 2.1x net debt to adjusted EBITDA, versus the guidance of ‘below 2x’.
The dividend policy is to deliver sustainable growth in future years – the 2024 payout was raised by 5% and this morning a first-half 2025 payout of 84.4p has been declared, 5% higher than last year. A similar rate of growth at the full-year stage would generate a yield of 4%.
In response to the weak share price and to reflect the board’s confidence in the continued strong free cashflow generation of the business, Reckitt is currently buying back its shares. The final tranche of a £1bn programme was completed in June and a new £1.0bn programme has been announced with today’s results to be completed over the next 12 months. As highlighted above, this is in addition to the capital return associated with the Essential Home deal.
Guidance for LFL net revenue growth for 2025 has been raised from 2%-4% to 3%-4%, with two divisions raised and one reduced.
· Core Reckitt is now expected to grow by more than 4%, versus 3%-4% previously. In H2, the company expects to benefit from the Mucinex sinus reformulation shelf reset in North America, the weaker cold and flu season seen in Q4 2024, a more balanced sell-in environment in Europe, and continued outsized growth in Emerging Markets.
· The company now expects low-to-mid single digit LFL net revenue growth in Mead Johnson Nutrition (from low single digit previously).
· The only disappointment is in Essential Home (the business the company has now agreed to sell) where guidance has been reduced to a low single-digit decline in LFL net revenue (from low single digit growth previously).
The Fuel for Growth programme is still expected to help drive adjusted operating profit ahead of net revenue growth. The group still expects to deliver another year of adjusted diluted EPS growth, albeit held back by a higher tax rate.
Source: Bloomberg
