As of yesterday, Alphabet’s (NASDAQ:GOOGL) stock was a laggard, at least when compared to other mega tech operators. Amazon.com (NASDAQ:AMZN) has posted a sizzling return of 50% year-to-date. Even with the recent pullback, Netflix (NASDAQ:NFLX) is up an astounding 80%. But GOOGL stock’s return has been a muted 13%. On the heels of Alphabet earnings, however, things are perking up.
So far this morning, GOOGL stock is up 4% to $1,265. This puts the market cap at a hefty $865 billion.
So then what did Alphabet earnings reveal about the quarter? Well, revenues shot-up by 25% to $32.7 billion and the adjusted earnings came to $11.75 per share. As for the expectations, the Street was looking for the top-line to hit $32.17 billion and earnings to be $9.66 billion.
For a company at the scale of GOOGL, the growth rate is amazing. Let’s face it, even for companies with a few billion in revenues, it can be tough to crank out a 20% ramp.
Alphabet Earnings — High Costs
Growth does not come cheap, though. In fact, for some time, investors have raised concerns about GOOGL stock because of the escalating costs. All in all, the talent war for tech companies is almost ridiculous, in terms of the salaries and stock packages. The current headcount at Google is at 89,000, up by 4,000 on a sequential basis.
But there is another issue: TAC or traffic acquisition costs. This is accounts for the expenses to gain access to distribution platforms, such as Apple’s (NASDAQ:AAPL) iPhone base. But in this quarter’s Alphabet earnings report, TAC was about $3 billion or 12.9% of revenues — down from 13.2% from the prior quarter. While this seems like a minimal decrease, it is still encouraging — especially if Google can continue to find efficiencies.
And yes, capital costs continue to be heavy. For the quarter, they almost doubled to $5.5 billion. But these costs these are necessary to build the core infrastructure — such as data centers — as well as to invest in next-generation technologies like AR (Augmented Reality) and AI (Artificial Intelligence).
Alphabet Earnings — Advertising
For Google’s Q2 earnings, advertising revenue jumped by 24% to $28 billion — representing 86% of overall revenues. True, this is risky as advertising is subject to the cycles in the economy. For the most part, it’s a line item that is easily cut.
But there are some positive factors to take into account. First of all, advertisers would prefer to focus on those platforms that have huge user bases. And yes, Google has many, like YouTube, Gmail, Maps, Android, Chrome, Play, and the Google search system. Keep in mind that each of these has over 1 billion users!
Next, there is a secular shift towards digital advertising. The reasons include: tracking of performance, targeting (such as based on demographics) and personalization.
Bottom Line on Alphabet Earnings
It’s true that GOOGL stock is not without its risks. Just last week the European Union lodged a $5 billion fine against the company because of practices regarding the Android system. And unfortunately, this may not be the only action. Google is definitely a fat target in various countries because of its dominance. It also does not help that the US is engaged in aggressive protectionist moves, which has already spurred retaliation.
But when it comes to legal matters, Google has a war chest of cash to fend them off. Besides, these actions generally take years to resolve.
So in the meantime, investors will probably just focus on the core fundamentals — and for the most part, there is little to be worried about.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
