Shares of Alphabet climbed 8.9% Wednesday after the company reported earnings that beat revenue expectations, easing investors' fears about the pandemic's impact on advertising. The stock move added more than $75 billion to its market cap, bringing it to $916.2 billion.
The Google parent company reported earnings of $9.87 per share and revenue $41.16 billion on Tuesday, missing analysts expectations on earnings but surpassing revenue estimates, based on data compiled by Refinitiv. The stock initially picked up after the report showed revenue growth of 13% from the previous year, a deceleration from the 17% growth during the same quarter last year but with significant headwinds.
Analysts were heartened by executives' comments suggesting the sharpest hit to revenues may be behind them. On the company's analyst call, CFO Ruth Porat said there was an "abrupt" drop-off in ad revenues in March but Alphabet has yet to see "further deterioration in the percentage of year-on-year revenue declines."
Porat said the company is also seeing "early signs" of users "returning to more commercial behavior" but warned they don't yet know how long that behavior will last or whether it will be monetizable.
Direct response ads on YouTube in particular stayed strong throughout the quarter. YouTube advertising brought in $4.04 billion in the quarter, up 33% year on year. While brand advertising slowed down around mid-March, direct response ads, which are used to prompt users to take an action like visiting a website, continued to grow.
With more people spending time inside, executives said Google products are seeing a surge in engagement on platforms like Android, YouTube and Google Classroom. The company also expressed confidence in its buyback program, which Porat said would continue as planned.
Analysts at Raymond James maintained a buy rating on the stock and $1,425 price target, citing strong long-term revenue growth and momentum in cloud.
Prior to the report, analysts were bracing for weak results in part because travel websites are some of Google's biggest advertisers. Expedia Chairman Barry Diller had previously told CNBC the company would spend less than $1 billion in advertising in 2020 after spending $5 billion in 2019. RBC Capital Markets Analyst Mark Mahaney said Booking.com parent Booking Holdings would likely cut spending on Google from $4 billion in 2019 to $1 billion or $2 billion this year.
"While the exit run rates were weak in absolute terms, given GOOG's high exposure to travel and SMB [small and medium-sized business], we thought these were favorable results," Pivotal Research Group analyst Michael Levine wrote in a note to clients Wednesday, giving the stock a buy rating and raising its price target from $1,425 to $1,575. "While Street numbers will get reduced, we think these numbers were way better than feared."
Analysts at Canaccord Genuity Capital Markets said the pandemic could actually end up aiding parts of Google's business, such as cloud.
"Looking past the near-term financial impact of COVID-19, we see Google likely benefiting as the pandemic could be a tailwind for ad budgets shifting online, momentum in Google Cloud supporting consolidated growth, and Other Bets providing optionality for patient investors," Canaccord said in a note Wednesday reiterating a buy rating and price target of $1,550.
"This, coupled with prudent expense management, a strong balance sheet, and share repurchases, gives us comfort around Alphabet's ability to successfully withstand this near-term disruption."