Alphabet Earnings: Stock Soars To New High As Revenues Beat Expectations

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Alphabet (NASDAQ:GOOG) announced its third quarter results on October 26. The company posted 24% y-o-y growth in revenues to $27.7 billion. In line with our expectations, much of the growth was driven by mobile search, the programmatic platform, and YouTube. Additionally, the company reported substantial growth in other revenues from Play, hardware, and Cloud. As a result of these strong results, the company’s stock soared to a new high in Thursday’s trading. The key highlights of the results were as follows:

  • Google segment revenues for the quarter grew by 23.4% y-o-y to $27.5 billion. Google’s operating profit grew by 29% to $8.74 billion, and the operating margin grew by 140 basis points to 31.8%.
  • The Other Bets business, which includes Fiber, Verily, Calico, Nest, self-driving cars, and incubation activities in X, reported revenue of $302 million and operating losses of $812 million on a quarterly basis.

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The core search business continued to witness pricing pressure, while ad volume for the company continued to grow. Furthermore, the growth in Google Sites paid clicks and CPCs primarily reflects the continued growth in YouTube, TrueView and mobile search. The key takeaways from the earnings were as follows:

  • Revenue from developing regions such as Latin America ($1.5 billion) and APAC ($4.2 billion) continue to lead the growth in search ad revenues, as revenues from these regions grew by 33% and 29%, respectively. While U.S. revenues grew by 21% year-over-year to $12.9 billion, EMEA revenues grew by 23% to $9.1 billion.
  • Traffic acquisition costs for the company grew by 31.5% y/y to $5.5 billion. TAC now accounts for 23% of total advertising revenues.
  • The programmatic platform, which includes AdMob, AdExchange and DoubleClick Bid Manager, continued to witness growth, resulting in 16% growth in network website revenues to $4.3 billion.
  • Cost per click (CPC), which measures the price paid for the number of times a visitor clicks on a search ad, has been in a steady decline for the past few years. In Q3, CPC declined by 21% on Google websites and 5% on network member sites. Furthermore, the aggregate cost per click declined by 18% during the quarter. The recent trend is indicative of geographical mix, device mix, currency headwinds, property mix and the rise of the programmatic platform.
  • YouTube continued to drive revenue growth, as 1.5 billion monthly viewers viewed 60 minutes of videos each day on their phones and tablets. The company is now offering more six second pre-roll ads, which has increased the ad viewability rate from 66% to 95%. The company is also planning to launch over 40 original shows this year for its subscription service, YouTube Red, to boost its revenues from these services in the coming quarters.
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Our $1026 price estimate for Google is around 10% ahead of the current market price.

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