Alphabet (GOOGL) Q3 Earnings and Revenues Beat Estimates

Zacks Equity Research
·5-min read

Alphabet Inc.’s GOOGL non-GAAP earnings of $16.40 per share for third-quarter 2020 surpassed the Zacks Consensus Estimate of $11.40. Earnings increased 61.9% sequentially and 62.1% year over year.

Net revenues — excluding total traffic acquisition cost or TAC (TAC is the portion of revenues shared with Google’s partners, and amounts paid to distribution partners and others who direct traffic to the Google website) — came in at $38.01 billion.

The figure was up 20.3% sequentially and 15.1% year over year. Also, net revenues outpaced the Zacks Consensus Estimate by 7.5% driven by strength in the company’s search, cloud and YouTube businesses.

Following strong third-quarter results, Alphabet’s share price increased 6.5% in after-hours trading.

Notably, primary drivers of the Google business haven’t changed. Yet, pricing remains under pressure, both on account of nagging FX concerns, and persistent strength in mobile and TrueView.

Nonetheless, Google continues to enjoy strength in the cloud business. The company’s Google Cloud recorded 44.8% year-over-year revenue growth for the quarter. It is to be noted that the firm will continue to invest in this space.

Markedly, advertising sales surged across all regions and industries during the quarter.

YouTube remains a strong contributor to the company’s growth. More than a thousand creators are currently engaged in the platform, bringing in a thousand subscribers every day. However, time and again it faces continuous pressure from advertisers to tighten controls on the fast-growing YouTube video service in a bid to avoid adult or offensive content.

Alphabet Inc. Price, Consensus and EPS Surprise

Alphabet Inc. Price, Consensus and EPS Surprise
Alphabet Inc. Price, Consensus and EPS Surprise

Alphabet Inc. price-consensus-eps-surprise-chart | Alphabet Inc. Quote

Numbers in Detail

Revenues

Gross total revenues of $46.2 billion increased 20.6% sequentially and 14% year over year (up 15% in constant currency).

The increase was driven by higher advertiser spend in Search and YouTube, as well as persistent strength in Google Cloud and Play.

Google Segment

The segment includes search, advertising, Play, hardware, and Cloud & Apps.

Coming to the search business, revenues from Google-owned and partner sites increased 9.9% and 8.9% year over year, accounting for 68% and 12.4% of quarterly revenues, respectively. This resulted in a year-over-year increase of 9.8% in total advertising revenues.

YouTube advertising revenues grew 32.4% year over year to $5 billion, accounting for 10.9% of quarterly revenues. Google other revenues — which consist of YouTube non-advertising revenues — were $5.5 billion for the third quarter, up 35.3% year over year.

In addition, Google cloud grew 44.8% year over year to $3.44 billion, accounting for 7.5% of quarterly revenues. The figure surpassed the expected value of $3.22 billion.

Other Bets Segment

Other Bets revenues were $178 million, up 20.3% sequentially and 14.8% year over year, accounting for 0.4% of total third-quarter revenues.

Total traffic acquisition cost or TAC was up 22% sequentially and 9% year over year.

Operating Results

Operating margin was 24.3%, up 160 basis points from the year-ago quarter.

Operating expenses (including research and development, sales and marketing, as well as general and administrative expenses) were $13.8 billion, up 0.6% from the year-ago quarter.

The increase in expenses was a result of heavy investment and other actions taken earlier this year as a result of the COVID outbreak.

Balance Sheet

At third quarter-end, Alphabet had a solid balance sheet, with cash & cash equivalents, and marketable securities of $119.7 billion, down from $121.1 billion in the comparable prior-quarter period.

The company generated $17 billion cash from operations for the third quarter and spent $5.4 billion on capex, netting a free cash flow of $11.6 billion.

Zacks Rank and Other Stocks to Consider

Currently, Alphabet carries a Zacks Rank #2 (Buy). Other top-ranked stocks in the broader technology sector include ON Semiconductor Corporation ON, Silicon Laboratories, Inc. SLAB and Alibaba Group Holding Limited BABA, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth for ON Semiconductor, Silicon Laboratories, and Alibaba is currently projected at 1.3%, 15% and 19.4%, respectively.

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