Morning Note: Market news and updates from Alphabet (Google) and P&G.

Market News

Risk assets are in favour on the back of dovish Fed speak and easing trade tensions – the 10-year Treasury yield fell to 4.30%, while gold slipped back to $3,300 per ounce. The dollar strengthened.

Beth Hammack ruled out a May interest-rate cut but said the central bank could move as early as June if it has clear evidence of the economy’s direction.

Bloomberg News reported China is considering suspending its 125% tariff on some US imports, as the economic costs of the trade war weigh heavily on certain industries. Medical equipment and ethane are among goods that may see exemptions. Donald Trump said the US was discussing trade with China, despite Beijing denying negotiations were taking place. He also signalled confidence in a Norway deal. Scott Bessent was optimistic about dealings with South Korea. Apple aims to source all its US-sold iPhones from India possibly next year.

US equities rose last night: S&P 500 (+2.0%); Nasdaq (+2.7%). After hours Google owner Alphabet rose by 5% on robust results (see below). Intel fell 5%, citing uncertainty around the tariff and regulatory environment as well as continued competitive pressure across various end markets. In Asia this morning, equities followed Wall Street higher: Nikkei 225 (+1.9%); Hang Seng (+0.8%). The yuan erased losses. Tokyo inflation picked up to 3.4% in April, its fastest in two years and supporting the BOJ’s rate-hike stance.

The FTSE 100 is currently 0.2% higher at 8,424. UK Retail Sales (ex-petrol) rose by 2.6% in March, well ahead of the 1.8% expected. However, GfK’s consumer confidence index fell by four points to minus 23 in April, the lowest under Labour. Sterling trades at $1.3310 and €1.1720.

Brent Crude moved up to $66.50 a barrel. Russia’s oil producers are drilling at their fastest pace in at least five years, preparing for potential OPEC+ output hikes and possible sanction relief. Activity is a third over pre-war levels.

Source: Bloomberg

Company News

Last night, Alphabet released first quarter results which were ahead of market expectations driven by broad growth across Search advertising, YouTube and Cloud. The company also announced an increase in its dividend and an enlarged share buyback programme. The shares were marked up by 5% in after-hours trading.

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, 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 artificial intelligence. We believe the shift to internet-connected devices and streamed TV means the growth of advertising dollars on Google Search and YouTube has much further to run. Machine learning capabilities should also help advertisers get higher return on investment and encourage them to continue to allocate their advertising budgets to Google.

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 a competitive edge. Capital allocation is spread across internal R&D, accretive M&A, and massive shareholder returns.

Alphabet has continued to launch a range of innovative devices, tools, and features, many of which are designed to make AI more helpful. Recent launches include Gemini 2.5, the group’s most intelligent AI mode, and the new Willow quantum chip.

Political and regulatory headwinds have become more elevated. Most importantly, last November, the DOJ filed its list of requests and potential remedies in the Google search case. Google responded with its proposed remedies and reiterated its intent to appeal the case, leaving little chance of a settlement. Next month, the DOJ and Google are expected to submit their respective final revised remedy proposals. As a result, in the absence of a settlement, the case is likely to drag on. The focus will also be on how the Trump administration views the case in light of Google’s importance in technology competition with China. 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 31 March 2025, revenue grew by 14% on a constant currency basis to $90.2bn, slightly better than the consensus forecast of $89.2bn and an acceleration from the 12% growth rate in the previous quarter. The performance reflected robust momentum across 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), generates revenue primarily from digital advertising and the sale of apps, digital content products, hardware, and YouTube subscription fees. During Q1, Google Services revenue grew by 10% to $77bn, reflecting strong performance across Google Search & other, Google subscriptions, platforms, and devices, and YouTube ads.

Google Search (which accounts for 76% of ad revenue) increased by 10%. Advertising from Google Network Members’ websites (11% of ad revenue) fell by 2%. The group separates out YouTube, which accounted for 13% of ad revenue in the quarter and grew by 10%. According to ratings firm Nielsen, in March of this year, YouTube accounted for 12% 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 19% in Q1 to $10.4bn.

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 Q1 they grew by 6% 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. Fee revenue comes from Google Cloud Platform services and Google Workspace collaboration tools. In Q1, Cloud grew by 28% to $12.3bn. This was better than the market forecast and not far behind the 30% growth in the previous quarter. Growth was led by Google Cloud Platform (GCP) across core GCP products, AI Infrastructure, and Generative AI Solutions. Although the group continues to invest to grow the cloud business, the division’s quarterly profit grew from $900m to $2,177m, with a margin of 17.8%.

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 $1.2bn, 20% 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 3% to 186k, while actions are being taken to optimise global office space and use AI to increase business productivity and efficiency. The company 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 31% in Q1.

In the latest quarter, ongoing efforts to improve efficiency helped deliver improved margins from 31.6% to 33.9% as costs and expenses increased at a slower rate than revenue (+8%). EPS grew by 49% in the quarter to $2.81, well above the consensus forecast of $2.01, albeit part of the beat was due to a step-up in Other Income, notably an unrealised gain of $8bn from its investment in SpaceX.

As expected, capital expenditure rose 43% to $17.2bn 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 plans to increase its capital expenditure in 2025 from $53bn to $75bn. There is some concern regarding the level of spend on AI and the potential return on investment. The company continued to highlight that demand currently exceeds supply, justifying the ramp-up in investment. We also note the group has a strong track record for generated returns – together, Cloud and YouTube (two businesses developed from scratch) exited 2024 at an annual revenue run rate of $110bn.

In March the group announced the acquisition of cybersecurity firm Wiz for $32bn. The deal represents an investment by Google Cloud in two large and growing secular trends: improving cloud security and the ability to use multiple clouds. The increased role of AI and the adoption of cloud services by many companies make cybersecurity increasingly important in defending against emergent risks and protecting national security. With this being the first big test of the current US administration’s tolerance for large scale M&A, we expect the deal to face heightened antitrust scrutiny, which is reflected in the deal not being expected to close until 2026.

Free cash flow generation was strong ($19bn in the quarter), despite ongoing spend on R&D and capex, while its huge cash pile (including marketable securities and long-term debt) stands at $84bn. This has allowed the group to significantly increase its returns to shareholders. During the latest quarter, the company bought back $15.1bn 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 and declared a payment of $0.21 per share, 5% higher than the previous quarter. We believe the dividend put the company on an equal footing with Microsoft and Apple in the minds of investors looking for yield.

AI remains a hot topic. We believe the 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. Furthermore, Google’s position in cloud services – it is one of the big three public providers – leaves it well placed to provide the infrastructure and computing power needed by AI, while the group’s user scale and usage frequency supports a wealth of data, providing another competitive advantage.

Looking forward, although the regulatory outlook will remain a headwind in the near term, the shares continue to trade on a valuation (17x 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

Yesterday lunchtime, Proctor & Gamble released results for the three months to 31 March 2025, the third quarter of its financial year to 30 June 2025. The company achieved modest growth in a challenging and volatile consumer and geopolitical environment. Guidance for the full year has been lowered to reflect underlying market conditions and, in response, the shares were marked down by 4%.

P&G is a global consumer goods company with annual sales of $84bn across a broad range of iconic brands including Gillette, Crest, Ariel, Head & Shoulders, and Pampers. The focus is on daily use categories. The group generates around half of its sales in North America, a fifth in Europe, and the remainder in emerging markets.

In the three months to 31 March, net sales fell by 2% to $19.8bn, slightly below the market forecast of $20.1bn, against a challenging economic and geopolitical backdrop.

Organic growth, which excludes the impact of acquisitions, disposals, and negative currency movements, was up 1% in the quarter, against a tough year-on-year comparative. Growth was driven by higher pricing, with volume and mix both having a neutral impact.

However, growth was broad-based, with 7 of 10 product categories growing organic sales, below the 9/10 in the previous quarter. Global aggregate value share was modestly down on the prior year, with 27 of the group’s top 50 category/country combinations holding or growing share in the quarter.

The group operates across five divisions:

Fabric & Home Care (35% of full-year sales) was flat in organic terms.

• Baby, Feminine & Family Care (24% of sales) fell by 1%, driven by a decline in family care products.

• Beauty (18% of sales) rose by 2%, driven high single-digit growth in personal care, offset in part by a decline in skin care.

• Health Care (14% of sales) grew by 4%, driven by personal health care products.

• Grooming (8% of sales) grew by 3% as a result of innovation-driven volume growth.

On a currency-neutral basis, the core gross margin fell by 10 basis points in the quarter to 51.2%, driven by gross productivity savings and higher pricing, more than offset by unfavourable commodity costs, unfavourable product mix, and product reinvestments. The operating margin rose by 100bps to 23.1%. Core EPS grew by 1% at constant currency in the quarter to $1.54, in line with the market forecast of $1.53.

Adjusted free cash flow was $2.8bn and adjusted free cash flow productivity was 75%, below the 90% target. The group ended the quarter with net debt of $25.0bn and returned over $3.8bn of cash to shareholders through dividends ($2.4bn) and share repurchases ($1.4bn). The group has increased its dividend for 69 years in a row.

For the financial year to June 2025, the group now expects to deliver organic sales growth of 2% (vs. 3%-5% previously) and core EPS growth of 2%-4% (vs. 5%-7% previously). The company still expects free cash flow productivity of 90% and to pay around $10bn in dividends and to repurchase $6bn-$7bn of shares in the year.

Source: Bloomberg