Earnings Review: Alphabet Inc. Q2 2017

  • Alphabet accrued the EU antitrust fine and still beat on earnings and revenue.
  • Revenue growth was strong however the aggregate cost per click was down.
  • The company is in the middle of changing its business and it is dominating the digital advertising
  • The stock is a buy on any weakness or any market selloff.

Alphabet, the parent company of Google beat again on earnings by a mile even after its fine. The company accrued its EU antitrust fine* of $2.7 billion which reduced earnings from $8.90/share to $5.01/share and still beat analyst expectations by $0.52 (*the fine is still being disputed the company might not end up paying for it.*). In terms of revenue, Alphabet generated $26.01 billion versus analyst expectations of $25.6 billion. I estimated that the company would earn $8.38/share in earnings. In terms of revenue, I estimated Alphabet would generate $20.86 billion from its Google properties and they reported $21.52 billion. This got me a ranking of 81 out of 475 analyst who follow the stock on Estimize.

Google is still the main revenue driver for the company and that business seems to be intact and growing at a steady pace. Google is still growing it’s revenue by 20%. Alphabet’s other “bets”segment(which includes Google Home, Google Fiber,Google Capital, Waymo etc) revenue grew by 34% but it’s still a small part of the company with its $248 million in revenue. The company is investing heaving its other bets with the cash its making from digital advertising. The company is actually evolving itself into an artificial intelligence first company. It started off as a search company then it became a mobile and cloud company now it’s becoming an artificial intelligence company. Even the Google CEO, Sundar Pichai said on the conference call said the company is committed to investing heavily in machine learning.

The only area of concern on Alphabet’s report was that Google aggregate cost per click was down 23% compared to a year ago. This number was worse than expected and maybe shows a bit of pricing pressure from Facebook who are a distant second in digital ad space. Besides that was a great quarter from Alphabet. They are still the leaders in digital advertising during this third evolution of its company. The company seems to be now ramping up its efforts on cloud with some of its management saying they will be the leaders in the cloud in 2020. The only way I see that happening is if they acquire Salesforce. The company had an ending cash balance of $94.7 billion, after accruing its EU fine and this is up from $86.3 billion last quarter.

Grade: This was a great quarter overall despite the EU fine and the aggregate cost number. The company’s main business is doing well and growing at 20% while the company transitions itself into an artificial intelligence company. I would give the report a B+ because I hold this company to a high standard. I would buy this stock on any pullback or market selloff.

Disclosure: Cresco Investments is long Alphabet, Inc. (Stock Ticker: GOOGL)

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor.

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