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Alphabet Sales Top Analyst Estimates, Calming Growth Concern

Gerrit De Vynck

(Bloomberg) -- Alphabet Inc. shares jumped the most in four years after the internet giant reported revenue that beat Wall Street expectations, calming concern about slowing growth.

Second-quarter sales, excluding payments to partners, came in at $31.7 billion, Alphabet said in a statement. Analysts were looking for $30.8 billion, according to data compiled by Bloomberg.

The Google parent also announced a plan to repurchase $25 billion of the company’s Class C stock, the biggest buyback in the company’s history. The cloud business grew strongly, too. Alphabet shares surged 11% at 11:40 a.m. in New York, the biggest intraday increase since the summer of 2015.

Google’s advertising sales grew 16% overall. That was slower than many recent periods, but it was a welcome relief from the first quarter of 2019, when Google missed Wall Street revenue expectations and saw its shares plunge. The stock had lagged rivals recently on concern poor results might continue.

Google is still able to find more places to put ads around the web, said Christopher Rossbach, chief investment officer at J. Stern & Co., which owns Alphabet shares. “Many of Google’s growth opportunities remain. For example, advertising on its Maps properties,” he added.

For years, Google has grown its advertising business at an annual rate of at least 20% by stuffing more ads into mobile search results, luring viewers to YouTube and automating the web’s complex advertising process. The company is investing heavily in new technology, such as cloud computing and a voice-controlled digital assistant, while experimenting with different ad formats.

Thursday’s results buy Google more time to pursue these initiatives, along with longer-term projects including driverless cars.

“We’re delivering strong growth,” Ruth Porat, chief financial officer of Alphabet, said in a statement. “Our ongoing investments in compute capabilities and engineering talent reflect the compelling opportunities we see across the company.”

Cloud-computing is Google’s fastest-growing business and second-quarter results put the operation on course to generate more than $8 billion annually, Chief Executive Officer Sundar Pichai said during a conference call. That’s around a quarter of the sales produced by Amazon.com Inc.’s AWS cloud unit, but the solid growth gave investors hope that Google can keep pace with Amazon and Microsoft Corp. in this booming business.

The $8 billion run rate was $1 billion higher than the estimate of RBC Capital Markets analyst Mark Mahaney. The results show Google is getting more tenacious in this market. “Here come the cloud wars,” Mahaney wrote in a note to clients.

Other revenue, which includes cloud business and consumer hardware, grew 40% to $6.18 billion. Late last year, Oracle Corp. executive Thomas Kurian was tapped as CEO of Google Cloud. He narrowed the unit’s focus on specific industries and bought startup Looker for $2.6 billion.

Another positive sign for investors: Capital expenditures totaled $6.9 billion in the second quarter, up 30% from last year. The same quarter last year saw a year-over-year increase of almost 90%.

That said, Porat indicated costs would increase through the rest of 2019. The company plans to hire more employees for the cloud business. Sales and marketing costs will also grow at the end of this year as Google promotes its products for the holiday season, she said.

Net income was $9.95 billion, or $14.21 a share, in the second quarter. That compares with profit of $8.27 billion, or $11.75 a share, a year earlier, Alphabet said.

(Updates with analyst comment in 10th paragraph.)

--With assistance from Mark Bergen.

To contact the reporter on this story: Gerrit De Vynck in New York at gdevynck@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Alistair Barr, Andrew Pollack

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