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Alphabet (GOOGL) Down 0.1% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Alphabet (GOOGL). Shares have lost about 0.1% in that time frame, underperforming the S&P 500.

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

Alphabet Earnings Crush Q3 Estimates, Revenues Rise Y/Y

Alphabet’s third-quarter 2021 earnings of $27.99 per share surpassed the Zacks Consensus Estimate by 21.01%. The figure surged 70.7% year over year and 2.7% sequentially.

Revenues of $65.1 billion increased 41% year over year (39% at constant currency). The figure rose 5.2% from the prior quarter.

Net revenues — excluding total traffic acquisition costs or TAC (TAC is the portion of revenues shared with Google’s partners, and amounts paid to distribution partners and others, who direct traffic to the Google website) — were $53.6 billion, which outpaced the consensus mark by 3.5%. The figure rose 41.1% and 5.2% from the year-ago quarter and the previous quarter, respectively.

TAC of $11.5 billion was up 40.8% year over year and 5.2% sequentially.

Top-line growth was driven by the solid momentum across the company’s search, advertising and cloud businesses. Also, growing momentum across its Other Bets segment contributed well.

The company’s growing investments in AI and the expanding cloud services portfolio, which are expected to yield huge returns in the days ahead, remain major positives. This, in turn, is expected to continue instilling investors’ optimism in the stock.

Top-Line Details

The company reports revenues under Google Services, Google Cloud and Other Bets.

Google Services

Revenues from the Google services business increased 40.7% year over year to $59.9 billion, accounting for 91.9% of quarterly revenues.

Under the services business, search revenues from Google-owned sites increased 43.9% year over year to $37.9 billion.

YouTube advertising revenues grew 43% year over year to $7.2 billion, while Network advertising revenues increased 39.8% to $7.9 billion.

Total Google advertising revenues grew 43.2% year over year to $53.1 billion and accounted for 81.6% of total revenues.

Google Other revenues — which consist of Google Play and YouTube non-advertising revenues — were $6.7 billion for the third quarter, up 23.3% year over year.

Google Cloud

Google Cloud revenues rose 44.9% year over year to $4.9 billion, accounting for 7.7% of the quarterly revenues.

Other Bets

Other Bets’ revenues were $182 million, up 2.2% year over year, accounting for 0.3% of total third-quarter revenues.

Operating Details

Costs and operating expenses were $44.1 billion, up 26.1% year over year. As a percentage of revenues, the figure contracted 800 bps from the year-ago quarter.

The operating margin was 32.3%, which expanded 800 basis points (bps) year over year. Segment-wise, Google Services’ operating margin of 40% expanded 610 bps from the prior-year quarter.

Google Cloud and Other Bets reported losses of $644 million and $1.3 billion, respectively.

Balance Sheet

As of Sep 30, 2021, cash and cash equivalents, and marketable securities were $142 billion, up from $135.9 billion as of Jun 30, 2021.

The company generated $25.5 billion in cash from operations in the third quarter compared with $21.9 billion in the second quarter.

It spent $6.8 billion on capex, netting a free cash flow of $18.7 billion in the reported quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 7.51% due to these changes.

VGM Scores

At this time, Alphabet has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Alphabet has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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