Google Jumps After Beating Across The Board

And they're off.

What until now was a solid, if not stellar earnings season, is about to go into overdrive as the tech giants report Q3 earnings, although unlike previous quarters, growth for the Magnificent 7 is expected to be far more subdued.

So turning to the first true megacap to report earnings (after a stellar print from minicap TSLA last week) Google parent Alphabet which as a reminder yesterday Goldman pointed out that ahead of earnings hedge fund positioning here was not as excessive (at 6/10), and may be why the stock is soaring some 4% after the close on what is a solid beat across the board. Here are the details :

• Q3 EPS $2.12, up 37% and beating estimate $1.84
• Q3 Revenue $88.27 billion, beating estimate $86.45 billion
  • Google advertising revenue $65.85 billion, beating estimate $65.5 billion
    • Google Search & Other Revenue $49.39 billion, beating estimate $49.08 billion
  • YouTube ads revenue $8.92 billion, beating estimate $8.89 billion
  • Google Network Revenue $7.55 billion, beating estimate $7.41 billion
  • Google Subscriptions, Platforms and Devices Revenue $10.66 billion, beating estimate $9.79 billion
  • Google Services revenue $76.51 billion, beating estimate $75.24 billion
  • Google Cloud revenue $11.35 billion, beating estimate $10.79 billion
  • Other Bets revenue $388 million, beating estimate $377.9 million
    
• Operating income $28.52 billion, estimate $26.67 billion
  • Google Services operating income $30.86 billion, beating estimate $28.47 billion
  • Google Cloud operating income $1.95 billion, beating estimate $1.11 billion
  • Other Bets operating loss $1.12 billion, missing estimate loss $1.16 billion
    
• Operating margin 32%, beating estimate 31.4%
• Net income was $26.3 billion, beating $22.8 billion estimate.
• Capital expenditure $13.06 billion, beating estimates of $12.88 billion
• Number of employees 181,269, down from 182,381 a year ago.

A quick point on YouTube: it was bought by Google in 2006 for $1.65 billion; YouTube now generates $1.65 billion of revenue every 16 days.

The results visually:

While Google's cloud numbers were stellar, with revenue rising from $8.4BN to $11.3BN, and beating estimates of $10.8BN, what investors wanted to hear was more about the company's progress on AI. This is what CEO Sundar Pichai had to say:

In Search, our new AI features are expanding what people can search for and how they search for it. In Cloud, our AI solutions are helping drive deeper product adoption with existing customers, attract new customers and win larger deals. And YouTube’s total ads and subscription revenues surpassed $50 billion over the past four quarters for the first time.

Like other Big Tech companies, Alphabet has been plowing money into developing artificial intelligence, a strategy that has helped drive demand for its cloud services, which saw revenue rise 32% in the first quarter. While Google remains a distant third in the cloud computing market, trailing Amazon and Microsoft, the company’s prowess in AI could help it close the gap.

Ironically, Google developed much of the underlying technology being used in the AI boom today, and has woven it into products from web search to its suite of enterprise software from Gmail to Google Docs. Yet ever since OpenAI’s ChatGPT was released in late 2022, Google has been battling the perception that it’s lagging behind Microsoft and OpenAI in rolling out new generative AI tools. The arrival of popular chatbots such as ChatGPT, which answers questions in a conversational tone rather than providing lists of links to other websites, has posed a threat to Google’s two-decade stranglehold on search. The company is struggling to compete in generative AI without cannibalizing its core profit machine.

Google has been scrambling to reassert its early lead in AI, after its early efforts were marred by embarrassing blunders, including a scandal over how its AI model Gemini handled race that forced the company to suspend image generation of people.

And as the company seeks to establish itself as a leader in AI, it wants to make sure that investors are rewarded to wait, and the company not only announced a cash dividend at 20 cents...

On October 29, 2024, Alphabet announced a cash dividend of $0.20 per share that will be paid on December 16, 2024, to stockholders of record as of December 9, 2024, on each of the company’s Class A, Class B, and Class C shares.

... but also announced repurchased $15.3 billion in stock under its new $70 billion buyback program.

While investors have shown they are excited about the prospects of AI, they want tech companies to continue to focus on revenue and profit in the meantime. Meta, which competes with Google in AI and also digital advertising, suffered its worst stock decline since October 2022 after reporting that it would spend billions of dollars more this year on AI efforts and projecting weaker revenue for the current quarter. For its part, Google - which does not do forecasts - paid $13.1BN in capex in the quarter, about $200 million more than estimated, but that’s not a huge difference and was more than made up for by the rise in profits in its core businesses.

The Google owner has been suffering compared to the rest of the Magnificent Seven recently. Investors appear to be skeptical of its AI spending -- and when it will filter through to the bottom line -- and that’s weighed on the stock.

For all the hoopla about AI, search advertising remains the engine of Google’s lucrative business, and the company is facing heightened competition there, too. Meta has been seeding AI tools throughout its advertising business and Snap Inc. has also undergone a total revamp of its ad business to improve ad targeting. The digital ad market is recovering from a post-pandemic slump, buoyed by the Olympics Games this summer, but Google is increasingly vying for those ad dollars with Meta and Snap.

Additionally, if consumers gravitate from Google search to the new wave of chatbots, that could imperil the company’s search advertising juggernaut, which is expected to generate nearly $200 billion in revenue this year and the bulk of Alphabet’s profit.

Cloud has been a bright spot for Google, after it first became profitable early last year. Many young AI startups are founded by former Google employees, creating a strong pipeline of cloud clients.

For now, however, these concerns were on the backburner, with GOOGL stock jumping about 4% after hours, but still well below its all time high reached in early July when it briefly traded above $190.

For now, however, these concerns were on the backburner, with GOOGL stock exploding about 12% after hours, and trading at a new all time high.