Revenue continues to grow at a blistering pace for Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG). If the third quarter is any sign of the expected upside in the search engine giant’s business, investors in Google stock may expect more impressive results this year.
Alphabet’s revenue grew an impressive 24% in the third quarter compared to last year. Driven by strong advertising revenues, mobile search led the company’s growth. Other divisions played an important role in the results. This includes hardware, Google Play and Cloud.
Cost of revenues also grew, going up 28% year-over-year to $11.1 billion in the same period. Operational costs for Alphabet’s data centers, acquisition costs and hardware-related costs all rose. The conglomerate ended the quarter with a staff count of 78,101, up by almost 2,500 people from last quarter.
Although Alphabet is pushing hard to grow hardware sales, chances are good that demand for its Pixel smartphone rose during the holiday period when it offered a discount. It still needs other hardware manufacturers to design hardware that allows Google-made apps to work optimally. Also, having more people on Android will give usage for Google Search and Assistant solid support.
Google needs massive data points to better optimize its AI code. Its competitors, which include Microsoft Corporation (NASDAQ:MSFT) and Apple Inc. (NASDAQ:AAPL), are both spending significant resources developing AI and machine-learning solutions.
The AI market is still nascent, but Alphabet must get ahead of the trends or risk falling behind to its competitors. If that happens, Google Assistant could, for example, lose out to Apple’s Siri or Microsoft’s Cortana.
Alphabet’s deep interest in the Pixel phone also has to do with staying involved in the developments of virtual reality and augmented reality. It cannot be sure which, or if both, technologies will become mainstream. So for now, Alphabet must accelerate its hardware business through its strategic partnership with HTC.
From the time Google released Google Home and VR, it is clear that the Pixel phones are central to giving users access to Google Assistant through multiple device types.
Will viewers notice the increase in ad placements on YouTube? For investors, the more ads Google shows to visitors, the better it is for revenue. So long as visitors have no other free alternatives, they will tolerate the ads. In the third quarter, YouTube had over 1.5 billion users who on average, spent 60 minutes a day on mobile. Every day, users spent 100 million hours on YouTube, up 70%.
Alphabet will continue looking for ways to monetize YouTube content. YouTube Red will have 40 original shows this year. YouTube TV, which streams live TV services to subscribers, will expand into new markets.
Its success is not certain, and investors who doubt YouTube’s value may invest in Netflix, Inc. (NASDAQ:NFLX) instead. But Netflix stock is not cheap. It trades at a PEG (P/E to growth) ratio of 2.80 times, compared to 1.70 times for Google stock.
In the current fourth quarter, Alphabet will spend a healthy amount on marketing and sales to make the most from the seasonal strength of the holiday period. This activity is in addition to its focus on building on the existing community, driving growth, and expanding the subscriptions business.
Google stock trades at a premium with a P/E of nearly 36 times. Trading at close to fair value (per finbox.io), investors may want to wait for the stock to pull back before getting too much exposure in GOOGL stock. If Alphabet stock continues its uptrend, then having a small weighting in it will not hurt.
Disclosure: Author does not own shares in any of the companies mentioned.