Source: PaxForex Premium Analytics Portal, Fundamental Insight
In the wake of Alphabet's release of its Q3 2023 report, both classes of Alphabet stock, GOOGL and GOOG, experienced declines in after-hours trading, dropping by 6.1% and 5.9%, respectively. The primary reason for this downward trend can be attributed to Google Cloud's slower growth, which fell short of Wall Street's expectations. Nevertheless, it's important to note that the company's Q3 revenue and earnings managed to exceed analyst consensus estimates.
A closer look at Alphabet's Q3 results reveals four key metrics of interest:
Revenue Growth of 11%: Alphabet's net sales increased by 11% compared to the previous year (and the same in constant currency), reaching a total of $76.7 billion. This growth was driven by substantial improvements in the Search and YouTube segments, as well as the momentum in the Cloud division, as highlighted by CFO Ruth Porat in the earnings release.
Traffic acquisition cost increased by 6.9% year over year, resulting in a revenue decrease of $12.6 billion. In the prior quarter, Q2 2023, revenue had risen by 7% year over year (and 9% in constant currency) to $74.6 billion. Total ad revenue experienced a slight increase of 3.3% year over year. Additionally, revenue from Google Cloud, Google other, and other bets grew by 28%, 24%, and 48%, respectively.
YouTube's Strong Performance: In Q3, YouTube stood out with a 12% growth in ad revenue. This is a noteworthy recovery considering the recent challenges faced by the video-streaming platform, likely due to increased competition from TikTok. In the first and second quarters of the year (Q1 and Q2), YouTube's year-over-year revenue had fallen by 2.6% and risen by 4.4%, respectively.
Google Cloud's Performance: Google Cloud reported $8.4 billion in revenue, slightly below Wall Street's expectation of $8.6 billion. Notably, this business unit's year-over-year revenue growth exhibited a slowdown in Q3 compared to the preceding quarters. It had seen 28% growth in Q1 and Q2, but this figure decreased to 22% in Q3. This shift has raised concerns among investors, as Google Cloud has historically been a major driver of revenue growth for the company.
For perspective, Microsoft's Azure and other cloud services experienced a 29% year-over-year revenue growth in its fiscal first quarter. Microsoft also reported its earnings after the market closed on Tuesday. Further insight into the performance of Google Cloud will be available this Thursday when Amazon releases its Q3 results, including those for its cloud computing business, AWS.
Operating Income Soared by 25%: Operating income witnessed a substantial 25% year-over-year increase, reaching $21.3 billion. The operating margin, calculated by dividing operating income by revenue, rose to 28%, up from the 25% recorded in the same period last year. This impressive boost in operating income and net income was attributed to cost savings resulting from the company's workforce reduction efforts over the past year.
Google Services: This segment, which includes the core ad business and Google Other (largely comprised of hardware), generated an operating profit of $23.9 billion, marking a 27% year-over-year increase. Notably, this segment's operating profit was positively impacted by the transition of Google DeepMind, the artificial intelligence (AI) research operation, from being part of Google Services to unallocated corporate costs.
Google Cloud: Google Cloud turned in an operating profit of $226 million, a remarkable turnaround from the $440 million loss recorded in the same period the previous year.
Other Bets: However, the Other Bets segment reported an operating loss of $1.2 billion, representing a 2.5% wider loss compared to the year-ago quarter.
Earnings per Share (EPS) Surged by 46%: Net income reached $19.7 billion, equivalent to $1.55 per share, indicating a remarkable 46% increase from the previous year. This exceeded Wall Street's expectations, which were anticipating earnings per share (EPS) of $1.36.
Operating Cash Flow Grew by 31%: Alphabet generated $30.7 billion in cash from its operations during the quarter, representing a 31% increase from the same period in the previous year. As a result, the company closed the quarter with cash and cash equivalents totaling $30.7 billion, marking a 40% increase from the end of 2022.
In summary, Alphabet's Q3 2023 results demonstrated strong performance, including a noteworthy rebound in ad revenue. While there is some concern about the deceleration in Google Cloud's revenue growth on a sequential basis, it's important to remember that assessing a business or its units over just one, two, or even three quarters is a relatively short timeframe for long-term investors.
As long as the price is below 133.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 126.11
- Take Profit 1: 121.00
- Take Profit 2: 116.00
Alternative scenario:
If the level of 133.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 133.00
- Take Profit 1: 139.00
- Take Profit 2: 145.00
