Alphabet's GOOGL/GOOG third-quarter revenue exceeded the S&P Capital IQ consensus estimates, while it missed on the bottom line. In our view, the better-than-expected revenue displays Alphabet's network effect economic moat source as the firm's growing ecosystem keeps increasing the usage of its products and services, attracting advertisers and creating further monetization opportunities. Search remained one of the main top line growth drivers as the firm has again enhanced its search offering. The firm's quarterly results also supported our view that its cloud business may grow impressively while it diversifies Google's overall revenue. We have not made material changes to our model and are maintaining our $1,300 per share fair value estimate for Alphabet. While this wide-moat name remains a 3-star stock, we believe it becomes attractive on any pullback.
Total third-quarter revenue came in at $40.5 billion, up 20% from last year. Since the firm's first-quarter revenue miss (with respect to the S&P Capital IQ consensus at the time), it appears that Google is back on track attracting advertisers and users, and comfortably selling its ad inventory, as we anticipated at the time. Advertising revenue increased 17% year over year, as ads sold on the firm's owned and operated properties, such as YouTube, continued to grow. In addition, further usage of Google's search, whether on mobile devices or desktops, kept attracting advertisers. The company has improved its search capabilities with further investment in machine learning focusing on natural language processing which helps better interpret a user's questions or phrases. Google is also trying to further monetize users by providing additional relevant content on the search site to keep users engaged. The firm refers to this as Google Discover (formerly Google Feed).
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