Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), parent of search engine giant Google, may be getting a bit long in the tooth and have lost a step since its earlier days. The fact that Google stock just logged its best one-day gain in four years, however, makes it clear this tech titan isn’t the has-been some traders were treating it as just three months ago.
Its second-quarter results were the catalyst, of course. Alphabet topped its revenue and sales estimates for the three-month stretch ending in June, after falling short of top-line estimates for the first quarter.
Perhaps more important though, the company gave investors a clear reminder that one doesn’t want to bet against GOOGL stock for very long, if at all.
Alphabet Earnings Recap
It’s been a whirlwind three months for shareholders. Headed into Q1’s report posted after the close of business on April 29, Google stock had just made a record high near $1,297. By the close of the following day, shares were priced just below $1,199, down more than 7% and en route to an eventual low of $1,027 made in early June.
Alphabet, it seemed, was no longer the powerhouse it used to be.
The assumptions weren’t quite on target though. Not only did GOOGL stock pivot for the better in early June, but Friday’s near-10% jump has also carried it back to within sight of April’s peak.
That’s where the stock deserves to be, and the renewed uptrend is just as deserved. For its second quarter, Alphabet turned $38.9 billion into a per-share profit of $14.21, versus revenue expectations of $38.15 billion and analyst-modeled earnings of only $11.30 per share of Google stock. Sales were up 19% year-over-year, while per-share profits improved by 21%.
This is the old Alphabet investors used to know and love when it was still called Google. Truth be told though, the company wasn’t ever really the old Alphabet/Google. The first quarter was a blip that altered perceptions more than indicated problems.
The depth and breadth of last quarter’s success underscore that notion.
Google Stock Supported on All Fronts
Its second-quarter results were predominantly carried by revenue driven by the company’s ads seen by users of the Google search engine. The company drove $37.8 billion worth of ad revenue in Q2, up 19% from a year-ago figure of $32.5. However, traffic acquisition costs, or money paid to generate traffic at Alphabet-owned web properties, fell as a percentage of total revenue, from 23% to 22%.
Alphabet’s CFO Ruth Porat commented during the earnings call that “in the second quarter, YouTube was again the second largest contributor of revenue growth. And really pleased with the ongoing momentum that we’re seeing here.”
It’s a significant shift for the company, which along with other internet-advertising middlemen, has seen a steady deterioration in the marketability of ad space and increasing traffic acquisition costs as the product becomes more of a commodity.
The advent of mobile devices, where advertising has been found less effective, has only further crimped the differential between selling ad space and drawing consumers to them.
The modest 1% decline in the company’s cost per impression at its web properties suggests this deterioration has finally slowed to a crawl, perhaps setting up an outright recovery… even if a shallow one.
Simultaneously, after years of offering scant details, Alphabet finally offered up some specifics on its cloud computing business, which competes with Amazon.com (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT). Though both Microsoft and Amazon are bigger players in this market, Google’s annualized cloud revenue stands at $8 billion, up from an annual pace of only $4 billion as of the beginning of 2018.
Even the company’s consumer hardware business saw measurable improvement. Spurred by May’s launch of the Pixel 3a smartphone, unit sales during Q2 grew at more than twice the growth pace seen in the second quarter of 2018.
Looking Ahead for Google Stock
There’s little not to like, not just about its second-quarter results, but what it says about the company’s foundation. As Pivotal Research Group’s analyst Michael Levine conceded, the Q2 numbers suggested “stronger signs of life than anticipated.” Several analysts upped their target prices on Google stock following the release of the report, some of whom had lowered their target just three months earlier.
Although investors and analysts alike are more optimistic than they were less than a week ago, that optimism doesn’t necessarily make GOOGL stock an easy name to step into right now. The post-earnings jump, though it pushed shares to a deserved price, left behind a sizeable gap that could be at least partially filled in before the stock is able to resume its rally.
There’s little doubt the technology giant was quick to get a handle on what wasn’t working at the beginning of this year though.
As of this writing, James Brumley held a long position in Alphabet. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
