Alphabet Inc (GOOGL) Whiffs on Earnings, But Here’s the Bright Side

The world’s biggest and most recognizable all-things-internet name Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) reported its fourth-quarter numbers after the bell, and they fell unusually short of estimates.

Alphabet Inc (GOOGL) Whiffs on Earnings, But Here's the Bright Side

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For the quarter ending in December, the company formerly known as Google earned $9.36 per share versus expectations of $9.63.

Alphabet’s top line of $26.06 billion compares favorably to analyst predictions for revenue of $25.22 billion. The company reported a profit of $8.67 per share of GOOGL stock in the same quarter from a year earlier, when it drove sales of $21.33 billion.

The numbers interrupt a long-term streak of forward, even if not perfect, fiscal progress. Alphabet has topped estimates in five of the past seven quarters.

CFO Ruth Porat commented on the Alphabet earnings report:

“Our growth in the fourth quarter was exceptional — with revenues up 22% year on year and 24% on a constant currency basis. This performance was led by mobile search and YouTube. We’re seeing great momentum in Google’s newer investment areas and ongoing strong progress in Other Bets.”

GOOGL shares were 2.1% lower in after-hours trading.

New Focus on Hardware Going Well

Alphabet, while it was still called Google, was founded primarily as a web search engine, and that’s still the lion’s share of its revenue mix. Though aggregate cost-per-click fell, continuing a long (and industry-wide) trend of deterioration, with another 9% year-over-year decline, that dip continues to be more than offset by a sheer increase of volume.

Aggregate paid clicks grew 20% on a year-over-year basis. Google — the search engine and its ancillary products and services — contributed $25.8 billion worth of last quarter’s revenue, and was responsible for $7.88 billion of the $8.5 billion in Alphabet’s operating income.

Although search and ads are still its bread-and-butter business, the company has recently begun the development of hardware and Internet of Things devices. The highest-profile of these new initiatives is the so-called Pixel phone. Although the company had brought smartphones to the market in the past — like the Nexus — those were mostly third-party/branded handsets. The Pixel is a true, home-grown, in-house smartphone from Google that’s designed to take aim at the popular iPhone line from Apple Inc. (NASDAQ:AAPL).

Bloomberg recently reported that Alphabet sold an estimated 1 million Pixels last quarter; the company doesn’t provide such details. That doesn’t even come close to the 45.5 million iPhones Apple sold last quarter, but it’s a very good first effort.

The Pixel is just one way Alphabet has remained relevant as consumers continue to migrate from desktops to mobile devices. Its Android operating system is now the OS of choice on nearly 90% of all handheld devices sold, funneling users to Google’s apps, services and revenue-bearing display ads.

Digital Is Still Important

And the company is getting serious about squeezing more revenue out of its Google Play store. Going forward, Chromebooks will run all Android apps, making Chromebooks as well as more of its apps more marketable. The move poses a threat to the current king of laptop/notebook operating systems Microsoft Corporation (NASDAQ:MSFT).

YouTube was another bright spot for Alphabet during its fourth fiscal quarter.

Although garnering traffic has never been a problem for the online-video venue (the site attracts more than 30 million viewers per day, who collectively watch nearly 5 billion clips every day), optimizing the ad revenue YouTube generates has proven difficult. The organization seems to have finally found a winning formula though.

Again, Alphabet doesn’t provide such specifics, but RBC Capital analyst Mark Mahaney estimated that YouTube generates $10 billion in annual ad revenue, or roughly a tenth of the company’s total revenue. Porat also made a point of saying Mobile Search and YouTube led the company’s revenue growth for the quarter.

Looking Ahead for GOOGL Stock

Just within the past few days, two experts have chimed in with bullish expectations for GOOGL shares. Specifically, Pacific Crest began coverage of Alphabet last week with a price target of $1,030, and this week, Barron’s opined GOOGL shares could reach $1,000 before the end of 2017. Those targets are approximately 20% higher than where the stock closed on Thursday.

Analysts expect Alphabet to earn $41.07 per share this year, on $104.07 billion in revenue. Those figures are 19% and 16% higher, respectively, than 2016’s tally. Nothing about last quarter’s numbers suggests the company won’t reach those targets.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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