It has been about a month since the last earnings report for Alphabet (GOOGL). Shares have added about 1.6% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Alphabet Surpasses Q2 Earnings & Revenue Estimates
Alphabet Inc.’s non-GAAP earnings of $14.21 per share in second-quarter 2019 surpassed the Zacks Consensus Estimate of $11.49. Also, earnings increased 19.4% sequentially and 20.9% year over year.
Net revenues, excluding total traffic acquisition cost 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), came in at $31.7 billion, up 7.6% sequentially and 20.8% year over year.
Also, net revenues surpassed the Zacks Consensus Estimate of $30.90 billion.
Notably, primary drivers of the Google business haven’t changed. Yet, pricing remains under pressure, both on account of nagging FX concerns, and continued strength in mobile and TrueView.
Nonetheless, Google continues to enjoy strength in the mobile platform. Management is focused on driving mobile experiences and the company is well positioned to pick up strong intent-to-buy signals by studying mobile searches from its huge database. As a result, direct response marketers continue to show interest in it.
The company stated that Google Cloud is recording substantial revenue growth, reflecting ongoing momentum in the business. It reached annual revenue run rate of more than $8 billion.
YouTube, which remains a strong contributor to the company’s growth, is benefiting from improvement in online video consumption. More than a thousand creators are currently engaged in the platform, bringing in a thousand subscribers every day. However, time and again it faces continuous pressure from advertisers to tighten controls on the fast-growing YouTube video service, in a bid to avoid adult or offensive content.
Numbers in Detail
Gross total revenues of $38.9 billion increased 7.2% sequentially and 19.3% year over year (up 22% in constant currency or CC). The increase was primarily driven by strength in mobile search. Markedly, contributions from YouTube and cloud aided its revenues.
The segment includes search, advertising, Play, hardware, and Cloud & Apps.
Coming to the search business, revenues from Google-owned sites were up 6.4% on a sequential basis and that of partner sites increased 4.5%, resulting in an increase of 6.1% in total advertising revenues.
Google-owned and partner sites grew 17.5% and 9.1% year over year, respectively, accounting for 70.2% and 13.5% of the company’s quarterly revenues. This resulted in a year-over-year increase of 16.1% in total advertising revenues.
In addition, Other revenues increased 13.4% sequentially and 39.7% year over year, accounting for 15.9% of second-quarter revenues.
Other Bets Segment
In the second quarter, Other Bets revenues were $162 million, down 4.7% sequentially but up 11.7% year over year, accounting for 0.4% of total revenues.
Total traffic acquisition cost or TAC was up 5.5% sequentially and 12.7% year over year.
TAC paid out to network partners increased 4.1% sequentially and 6.2% year over year. Given the fact that mobile search carries higher TAC, the increase in mobile search revenues is driving related TAC, according to management.
TAC for distribution arrangements was up 6.9% sequentially and 20.2% year over year.
Cost per click on Google sites was down 1% sequentially and 11% from the year-ago quarter. Cost-per-impression on Google Network Members' properties increased 5% sequentially but decreased 1% year over year.
Paid clicks on Google properties were up 6% sequentially and 28% from the year-ago quarter. Google Impressions on Google Network Members' properties remained flat on a sequential basis but increased 11% on a year-over-year basis.
Operating expenses were $12.5 billion, up from the year-ago quarter, due to increase in headcount.
Excluding the impact of the EC fine, operating income was $9.2 billion, up 13% year over year on an operating margin of 24%.
At the end of the second quarter, Alphabet had a solid balance sheet, with cash & cash equivalents, and marketable securities of around $121.1 billion, up from $113.5 billion in the comparable prior-quarter period.
During the quarter, the company announced that its board has authorized to repurchase $25.0 billion of its common stock.
The company generated around $12.6 billion cash from operations in the second quarter and spent $6.1 billion on capex, netting a free cash flow of $6.5 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
Currently, Alphabet has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.
Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Alphabet has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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