ii view: Alphabet's Google juggernaut sustains momentum

Ad sales rose 53% from Q3 2020, while Cloud data losses almost halved. Buy, sell, or hold?

Third-quarter results to 30 September

• Revenue up 41% to $65.12 billion
• Earnings per share up 71% to $27.99
• Quarterly share buyback of $12.6 billion

Chief executive Sundar Pichai said:

“Five years ago, I laid out our vision to become an AI-first company. This quarter’s results show how our investments there are enabling us to build more helpful products for people and our partners. 

“Ongoing improvements to Search, and the new Pixel 6, are great examples. And as the digital transformation and shift to hybrid work continue, our Cloud services are helping organizations collaborate and stay secure.”

ii round-up:

Diversity from advertising on Google to YouTube streaming and cloud data provision continue to underpin Wall Street’s love affair with the US technology giant Alphabet (NASDAQ:GOOGL). 

Both revenues and earnings surpassed expectations in the third quarter, with advertising sales up 53% year-over-year to $53.13 billion and including a 43% jump in You Tube ad sales to $7.2 billion. 

Alphabet shares were little changed in afterhours US trading, having risen by more than 160% since pandemic induced market lows in March 2020. That compares to gain of around 122% for the broader technology heavy Nasdaq Composite index. 

Alphabet revenues for its Cloud data business rose 45% to $4.99 billion as operating losses almost halved to $644 million from $1.21 billion a year ago. Alphabet is battling hard in this area with rivals Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT). 

Sales for its Other Bets division, which includes the self-driving car business Waymo, were flat at $182 million, with losses rising to $1.29 billion from $1.1 billion in Q3 2020.  

ii view:

Alphabet operates across the three divisions of Google services, Cloud and Other Bets. Services also includes chrome, hardware, Google maps, Google play and search. The division generates revenues primarily from advertising. Subscription fees for YouTube Premium and YouTube TV also feed into the mix. 

For investors, 2020 and the pandemic proved that Alphabet’s core advertising business is vulnerable to sudden economic confidence shocks. Quarter two 2020 marked the first time that advertising sales had fallen, and Governments also have concerns about monopolistic powers.

But these latest results provide further evidence that online advertising has become firmly established, not just in corporate America but worldwide. Unlike Facebook (NASDAQ:FB) and Snap (NYSE:SNAP), Alphabet’s ownership of the Android operating system appears to have removed it from the worst of advertising privacy changes made at Apple (NASDAQ:AAPL). Some $12.6 billion has also been returned to shareholders over the quarter via share buybacks. In all, and with the analyst consensus estimate of fair value remaining at over $3,000 per share, investors appear unlikely to ditch this tech icon anytime soon. 

Positives

• Alphabet dominates the digital advertising market
• Executing share buybacks

Negatives

• Cloud business trails Amazon’s in sales
• Technology giants suffering increased global government scrutiny

The average rating of stock market analysts:

Strong buy