Earnings Scorecard: Alphabet Q3 2017

• Alphabet reported dazzling earnings as they beat estimates by a mile.
• The growth this company is showing is really impressive given the size of the company.
• Management is executing at a high level at this company. Out of the big technology growth companies, its stock is still the cheapest.

Alphabet, the parent company of Google reported a top-notch quarter that exceeded my high expectations of the company given the scandals in the past few months. First, EU regulators want to regulate the tech company as a news publisher. On the other hand, U.S. Congress has also summoned Alphabet’s executives to Capitol Hill to discuss solutions to Russian disinformation. We all know the hearing will definitely touch on Russia’s involvement in last year’s election in which politicians might call for more regulation on these tech giants.

Despite all of that noise, the company reported earnings of $9.57/share versus analyst expectations of $8.33. The revenue was even more impressive coming in at $27.8 billion beating estimates by $600 million. That revenue number represents an acceleration in year-over-year revenue growth which is now close to 24%. For a company with a market of $700 billion to be growing revenue at 24% is incredible. A majority of the revenue was generated by its advertising and this was evident in the increase in traffic acquisition cost (TAC) which rose to 71% up a percent from a year ago which still shows great margins. The “Other Bets” segment which includes things like Nest, and Google Fiber grew its revenue but still lost $812 million. Alphabet is not afraid of investing in the future but under the new CFO, Ruth Porat that spending will be controlled.

Although the spending is under control Alphabet is still making some serious investments. This quarter they spent $3.5 billion on investments and increased their employee headcount to 78,101 up from 69,953. From the quarter overall, the company generated $6.3 billion in free cash flow and the cash balance is now $100.1 billion. Management is now really focused on growing its cloud business which is now a $3.4 billion business as well as implementing artificial intelligence on its platforms. The company is also giving hardware another try with the Pixel smartphone and is also focusing on its Google Home device to compete with Amazon’s Alexa. Alphabet is also in the self-driving space with Waymo and its investment in Lyft.

Overall, it seems like despite the noise from regulators and politicians it’s business as usual at Alphabet. The stock is my number 1 to do well this year and maybe 2018 too because this company is still undervalued in comparison to the other tech giants like Facebook, Amazon, and Netflix. On top of that, they are the most well-built company that is vertically integrated to capitalize on artificial intelligence and machine learning. The company’s stock is trading at 24 times next year’s earnings with 24% revenue growth. The stock is still a buy even at these prices.

Grade: That was an A* quarter from Alphabet.

Estimates: Earnings- $8.90/share; Revenue- $21.97 billion on Estimize.

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.