Anybody who thought Alphabet (GOOG, GOOGL) was ill-prepared to thrive in a world now dominated by mobile devices rather than desktop devices were handed a bit of a surprise after Thursday’s close — earnings were up (quite a bit) for GOOGL stock, as were revenues.
GOOGL shares responded in kind, racing more than 9% higher in after-hours trading Thursday evening, and holding onto that gain Friday morning.
The Q3 numbers top off what’s becoming a long string of forward progress in spite of what seems like constant doubts. But while “more of the same” is likely in store from Alphabet for the foreseeable future, would-be investors may want to think twice before stepping into GOOGL at this exact moment.
Alphabet Earnings Recap
In its third fiscal quarter of 2015, Alphabet earned an adjusted $7.35 per share on revenue of $18.68 billion. Both were better than expected, and much better than the comparable figure from a year earlier. Analysts were only calling for a profit of $7.21 per share of GOOGL stock and a top line of $18.54 billion. In the same quarter of 2014, Alphabet posted income of $6.25 per share on revenue of $16.52 billion.
Perhaps of greater concern to shareholders is the effectiveness of its ad-sales effort. It was better, and worse, depending on your perspective. Cost-per-click prices fell 11% year-over-year. However, Google more than offset that weak pricing in sheer volume. The total number of clicks Google ads spurred last quarter grew 23% compared to the number of clicks seen in the third quarter of 2014.
Although no specifics were offered, YouTube and mobile advertising revenue were acknowledged as strong growth drivers for the quarter. In fact, Google CEO Sundar Pichai noted that half of the search engine’s queries are made using mobile devices, saying the opportunity with mobile advertising “is as compelling, or even better, than desktop.
However, Pichai offered no numerical details about mobile beyond that.
GOOGL: Looking Ahead
Clearly on the right growth trajectory, the short- and long-term outlooks for Alphabet are compelling. Those outlooks are bolstered by news that the company is initiating a $5.1 billion stock buyback, deploying part of the $72.7 billion cash hoard it’s sitting on.
The biggest news in the pipeline, of course, is the impending separation of Google’s results and Alphabet’s results beginning with the fourth quarter’s numbers due three months from now. At that point, the company will begin breaking down the results achieved by its collective advertising enterprises — the search engine and YouTube, mostly — headed up by Pichai, and by “everything else” that falls under the Alphabet umbrella, like Nest, Google X, its life-science efforts and so on.
Alphabet has led investors to believe it won’t provide any fiscal details beyond those two key divisions, and it’s unlikely the company will change its mind in the meantime. Regardless, the new reporting structure is expected to illustrate just how expensive many of its Google X and Google Capital projects are, yet simultaneously show just how profitable its advertising business is.
As of the latest tally, analysts are collectively expecting Alphabet to earn $8.08 per share in the fourth quarter of this year, and generate revenue of $20.61 billion. At those levels, both would be up by double digits again.
For next year, the pros expect income to grow from an estimated $28.83 per share of GOOGL stock in 2015 to $33.69, while the top line is projected to grow from $74.16 billion this year to $85.38 billion.
It’s an impressive outlook, but not one that’s hard to believe. Alphabet has reliably grown its top and bottom line for 10 straight years now, even when it wasn’t expected to do so.
Bottom Line for GOOGL Stock
While the corporate-level results are undeniable strong and positioned to remain strong now that its Android mobile operating system has outgrown its competition and now owns more than 80% of the mobile operating system market, that doesn’t mean GOOGL stock is inherently a buy.
Indeed, thanks to the big post-earnings-news surge, Alphabet is now trading at a forward-looking P/E of 22.
Combined with the fact that GOOGL now sits some 35% higher for the year-to-date, that may be the upper limit of a valuation investors can justify.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
