Alphabet stock pops as company crushes expectations

Key Points
  • The company beat Wall Street’s revenue expectations across each major section.
  • The company saw strong advertising growth, quelling fears of falling spending due to the Covid-19 pandemic.
  • Executives said that beginning in Q4, the company will break out operating income from Google Cloud.

In this article

Alphabet reports better than expected Q3 with strong YouTube and cloud numbers
Alphabet reports better than expected Q3 with strong YouTube and cloud numbers

Google parent company Alphabet's stock rose as much as 9% in after-hours trading as it crushed expectations for both earnings and revenue in its third-quarter earnings results, showing strong growth in advertising revenue across the board.

Here are the results.

  • Earnings per share: $16.40 vs $11.29 expected, according to Refinitiv estimates
  • Revenue: $46.17 billion vs $42.90 billion expected, according to Refinitiv estimates
  • Google Cloud: $3.44 billion vs. $3.32 billion estimated according to StreetAccount.
  • YouTube ads: $5.04 billion vs. $4.39 billion estimated, according to StreetAccount.
  • Traffic acquisition costs (TAC): $8.17 billion vs. $7.66 billion according to StreetAccount.

The company beat estimates across the board, following its first-ever revenue decline in Q2. The results showed a strong rebound in its core advertising business, which was hit hard by customer spending pullbacks amid the Covid-19 pandemic. It follows similarly strong earnings reports by ad-driven online companies Pinterest and Snap earlier this month.

For the quarter ending September 30, the company brought in total advertising revenue of $37.10 billion, compared to $33.80 billion a year ago. YouTube ad growth was particularly strong, up 32% from a year ago. Fears of a search advertising crunch did not materialize, as the company's "Search and Other" advertising category showed 6% growth from a year ago.

On the company's earnings call, CEO Sundar Pichai said, "This year, including this quarter, showed how valuable Google's founding product, search, has been to people."

Pichai said starting next quarter, it will report operating income for its cloud business, joining Amazon in giving investors more details.

"Starting with our results for the fourth quarter of 2020, we'll break out Google Cloud as a separate reporting segment," Pichai said. "With the segmentation, you will additionally see information about the scale of our investment, which will help gauge the progress we are making on the multi-year path ahead to create sustainable value."

Executives said YouTube has over 30 million music and premium paid subscribers and YouTube TV has more than 3 million subscribers. YouTube views for guided meditation videos are up 40% since mid-March, Porat said. Tutorials on how to make face masks have been viewed over one billion times.

Google's "Other Revenue," which includes hardware like its Pixel phones, came in at  $5.48 billion, compared to $4.05 billion a year ago. The rise was a result of Google Play engagement during the pandemic, CFO Ruth Porat said. "There are signs that user behavior is beginning to return to normalized levels," she added on the earnings call.

Alphabet said its revenue from "Other Bets," which includes its subsidiaries outside of Google like the self-driving car company Waymo and Life Sciences business Verily brought in $178 million compared to $155 million a year ago. Meanwhile, Other Bets showed an operating loss of $1.10 billion, up from $941 million a year ago.

Pichai briefly commented on the recent Department of Justice lawsuit, which alleged Google holds monopolistic power in the search market.

"Regarding the DoJ's lawsuit, we believe that our products are creating significant benefits and we'll confidently make our case," Pichai said. "Our company's focus remains on continuing our work to build a Search product that people love and value."

Correction: YouTube advertising revenues were $5.04 billion for the quarter, and TAC was $8.17 billion.