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Alphabet (GOOGL) Up 10.3% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Alphabet (GOOGL). Shares have added about 10.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Alphabet due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Alphabet Q3 Earnings & Revenues Beat, Increase Y/Y

Alphabet's third-quarter 2023 earnings of $1.55 per share beat the Zacks Consensus Estimate by 6.9%. The figure grew by 46.2% year over year.

Revenues of $76.7 billion increased 11% year over year (11% at constant currency).

Net revenues, excluding total traffic acquisition costs or TAC (the portion of revenues shared with Google’s partners and amounts paid to distribution partners and others who direct traffic to Google’s website), were $64.05 billion, which surpassed the consensus mark of $63.13 billion. The figure rose 11.8% from the year-ago quarter’s level.

TAC of $12.64 billion was up 6.9% year over year.

Top-line growth was driven by solid Search and YouTube’s performance. The growing cloud and Other Bets segments were a positive. Also, improving advertisement business was a plus.

Its growing momentum in Pixel devices remained a positive.

However, Alphabet continued to witness sluggishness in Google Network ads, which remained a concern. The company experienced slow growth in Google Cloud revenues, which was a major negative.

The company’s shares plunged 6.8% in pre-market trading due to lower-than-expected Google Cloud revenues.

Alphabet’s growing investments in AI to boost its Search, YouTube and cloud business are likely to yield huge returns in the days ahead. This is expected to instill investor optimism in the stock in the days ahead.

Segments in Detail

Alphabet reports revenues under Google Services, Google Cloud and Other Bets.

Google Services:

Revenues from the Google Services business increased 10.8% year over year to $67.99 billion, accounting for 88.6% of the total revenues.

Under this business, search revenues from Google-owned sites increased 11.3% year over year to $44.03 billion, surpassing the Zacks Consensus Estimate of $43.04 billion.

YouTube’s advertising revenues improved 12.4% year over year to $7.95 billion, while Network advertising revenues decreased 2.6% to $7.7 billion. While YouTube ad revenues came ahead of the Zacks Consensus Estimate of $7.84 billion, Network ad revenues were below the consensus mark of $7.9 billion.

Total Google advertising revenues were up 9.5% year over year to $59.65 billion and accounted for 77.8% of the total revenues. The figure beat the consensus mark of $58.94 billion.

Google’s Other revenues, consisting of Google Play and YouTube non-advertising revenues, were $8.34 billion for the third quarter, up 20.9% year over year. The figure came ahead of the consensus mark of $7.96 billion.

Google Cloud:

Google Cloud revenues rose 22.5% year over year to $8.41 billion, accounting for 10.9% of the quarter’s total revenues. The reported metric missed the Zacks Consensus Estimate of $8.54 billion.

Other Bets:

Other Bets’ revenues were $297 million, up 42.1% year over year and accounted for 0.4% of the total first-quarter revenues. The figure beat the consensus mark of $284 million.

Regional Details

EMEA (29.5% of total revenues): GOOGL generated $22.7 billion in revenues from the region, increasing 17% year over year.

APAC (17.1% of total revenues): The region generated $13.13 billion in revenues, up 14% from the year-ago quarter’s level.

Other Americas (6% of total revenues): The region generated $4.6 billion in revenues, up 10% on a year-over-year basis.

United States (47.4% of total revenues): Alphabet generated $36.35 billion in revenues from the region, which increased 9% from the prior-year quarter’s level.

Operating Details

Costs and operating expenses were $55.35 billion, up 6.5% year over year. As a percentage of revenues, the figure contracted 300 basis points (bps) from the year-ago quarter’s level.

The operating margin was 27.8%, which expanded 300 bps year over year. Segment-wise, Google Services’ operating margin of 35.2% expanded by 440 bps from the prior-year quarter’s level.

Google Cloud reported operating income of $266 million compared with a loss of $440 million in the year-ago quarter.

Other Bets reported a loss of $1.19 million compared with a loss of $1.22 billion in the prior-year quarter.

Balance Sheet

As of Sep 30, 2023, cash, cash equivalents and marketable securities were $119.9 billion, up from $118.3 billion as of Jun 30, 2023.

Long-term debt was $13.8 billion at the end of the reported quarter compared with $13.7 billion at the end of the previous quarter.

Alphabet generated $30.7 billion of cash from operations in third-quarter 2023 compared with $28.7 billion in second-quarter 2022.

GOOGL spent $8.06 billion on capex, netting a free cash flow of $22.6 billion in the reported quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

Currently, Alphabet has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Alphabet has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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