Alphabet Inc (GOOGL) Q3 Earnings: Great Googly Moogly!

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GOOGL - Alphabet Inc (GOOGL) Q3 Earnings: Great Googly Moogly!

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The investment lesson of this decade is that cloud rules. Once you have an addictive application running inside cloud data centers, the software scales automatically and the sky is the limit on profits.

Alphabet Inc (GOOGL) Q3 Earnings: Great Googly Moogly!

Google — from the artist now known as Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) — was the initial addictive cloud application.

While Google didn’t invent the cloud concept, it was the first company to take full advantage of it, virtualizing its software in scaled data centers, and using distributed computing to create vast streams of data that have made it the world’s dominant computing company.

The question as Alphabet announced third-quarter earnings on October 27, then, was how high could the cloud go?

The consensus number on earnings for the third quarter was $8.63 per share of GOOGL stock on revenues of $22.05 billion. The hoped-for “whisper number” was for $8.72 per share in earnings. This compared with earnings of $8.59 per share and revenues of $20.6 billion in the second quarter.

In other words, more cloud efficiency, more money on the bottom line — even if revenue soured a little.

In the five days before earnings, Google shares mirrored the behavior of the Nasdaq, as they frequently do, rising 2% on Monday, giving that back over the succeeding three days, but still sitting near their all-time high. While most analysts had buy ratings on GOOGL stock, Wedbush’s James Dix was calling it a “sell.”

So, how did he do?

The Number and Its Meaning

It was a beat. Make that a beatdown.

Alphabet net income came in at $6.326 billion, or $9.06 per share, on revenues of $22.451 billion. Earnings were up 34% from a year ago, and revenues were up 20%. Cost per click fell as YouTube cut traffic acquisition costs on mobile.

The initial reaction was to take shares up 2.1%, to $830, after they closed at around $817.

Most of what investors saw was simply full speed ahead. Traffic acquisition costs were 21% of revenue, just as they had been in the second quarter, and the same as a year ago. The revenue rise of 20% was in line with the second quarter’s 21%. The big surprise was paid clicks, up 33%, against 29% in the second quarter, meaning mobile and YouTube are now contributing strongly to earnings. Alphabet’s core business had operating earnings of $6.8 billion, up from $5.8 billion during the same period a year ago. The board also announced another $7 billion in share buybacks.

Reports that Google Fiber would cut back on its expansion plans, lay off people in many cities and look toward lower-cost ways of expanding access, instead of digging up my street (as they’re doing now), had created bearish sentiment. Craig Barratt, who had led the Google Fiber effort, announced he is stepping down, and the company seemed anxious to see if Webpass, acquired earlier this year, could deliver wireless technology that would reduce costs.

But reining in such “other bets” should have investors cheering.

You see, this means more of Google’s earnings are falling to the Alphabet bottom line. Alphabet is dropping its efforts in robotics and fiber cable, which are mature technologies, cutting operating losses, focusing instead on things like healthcare and self-driving cars, where it can create earth-shaking innovation.

Can Google Win in Hardware?

Attention now turns to Christmas and how GOOGL does as a hardware company.

In the past few weeks, the company has announced four important hardware products — the Google home speaker and home control system, Daydream View virtual reality headset, the Pixel phone and the Jamboard whiteboard.

The Daydream View will need to compete with a host of entrants including Facebook Inc (NASDAQ:FB), although the bigger threats should be Sony Corp (ADR) (NYSE:SNE) and Microsoft Corporation (NASDAQ:MSFT), which can tie their headsets to existing video game platforms.

Google Home is a direct attack on Amazon.com, Inc.’s (NASDAQ:AMZN) Echo, which created the market a year ago and still dominates it. GOOGL is hoping that great design, and its brand name, can eat into Amazon’s early lead.

The phone has a big opportunity, given the problems at Samsung Electronics (OTCMKTS:SSNLF) with its Galaxy Note 7. Advertising for the product has already begun, and the company doesn’t have to sell big numbers right away, because the Android ecosystem already dominates the market with a 70% share.

The Jamboard will take more time to reach the market, but re-imagining the whiteboard as a cloud device, something that can be shared among multiple groups, could transform the way offices work over time.

The key to that is “over time.” Alphabet has plenty of time to see if this bet works.

Dana Blankenhorn is a financial journalist and author of the science fiction story Into the Cloud. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long AMZN, FB, GOOGL and MSFT.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2016/10/alphabet-inc-googl-stock-q3-earnings-googly-iplace/.

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