Momentum Across Alphabet’s Business Is “Extraordinary”

Image: Shares of Alphabet look poised to break out to all-time highs.

By Brian Nelson, CFA

Alphabet (GOOG) (GOOGL) reported fantastic third quarter results October 29 that showed a beat on both the top- and bottom lines. Consolidated revenue increased 15% in the quarter (16% on a constant-currency basis), to $88.3 billion, versus consensus of $86.2 billion, with Google Services, total, revenue increasing 13% and Google Cloud revenue increasing 35%.

‘Google Search & other’ revenue and ‘YouTube ads’ revenue both increased 12.2% in the quarter, very healthy growth rates. Revenue for Google Network dipped modestly on a year-over-year basis, while Google subscriptions, platforms and devices revenue advanced 28%.

Total operating income increased 34% in the quarter, with its operating margin increasing 4.5 percentage points on a year-over-year basis (32.3% versus 27.8%). In the period, net income increased 34%, while earnings per share increased 37%, to $2.12, handily beating the consensus forecast by $0.27. CEO Sunar Pichai had the following to say about the quarter:

The momentum across the company is extraordinary. Our commitment to innovation, as well as our long-term focus and investment in AI, are paying off with consumers and partners benefiting from our AI tools.

In Search, our new AI features are expanding what people can search for and how they search for it. In Cloud, our AI solutions are helping drive deeper product adoption with existing customers, attract new customers and win larger deals. And YouTube’s total ads and subscription revenues surpassed $50 billion over the past four quarters for the first time.

We generated strong revenue growth in the quarter, and our ongoing efforts to improve efficiency helped deliver improved margins. I’m looking forward to driving more advances for consumers, customers and creators globally.

Alphabet ended the quarter with $93.2 billion in total cash and marketable securities and long-term debt of $12.3 billion. Cash flow from operations in the quarter was $30.7 billion, while capital spending totaled $13.1 billion, resulting in robust free cash flow generation of $17.6 billion. Year-to-date, cash flow from operations was $86.2 billion on capital spending of $38.3 billion, good for free cash flow generation of $47.9 billion. Alphabet also announced a cash dividend of $0.20 per share, to be paid to each of the company’s Class A, Class B, and Class C shares. Our fair value estimate stands at $188 per share.

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