Alphabet has not forgotten how to surprise
The results of Alphabet (GOOGL), Google’s parent company, exceeded revenue and net profit expectations. The corporation’s total income increased by 41%, to $65.12 billion, with the consensus of $63.53 billion.
Advertising revenue increased by 43% to $53.13 billion. This dynamic was due to the continued increased online activity of consumers and advertisers. As a result, Alphabet’s operating profit almost doubled compared to the development for the same period in 2020 and amounted to $21.03 billion with a consensus of $18.06 billion.
The operating margin increased from 24% to 32.3%, exceeding the forecast for growth to 28.5%. Intensive revenue growth and excellent discipline in cost management allowed EPS GAAP to reach a record $27.99 (+71%), significantly exceeding the value of $23.73 set in the forecast. CEO Sundar Pichai noted that investments in artificial intelligence technologies that the company has been making in the last five years are bearing fruit.
Advertising in the search engine, Google Maps, and other services (Google Search & another segment) brought $37.93 billion with a consensus of $36.31 billion. This segment to the pace of global economic recovery and the opening up of the economy; therefore, we assess the outpacing growth rates of revenue, despite the negative impact of the new waves of the pandemic, as particularly strong.
Earlier, the company announced its intention to change the main search page, offering “endless” scrolling of search results instead of a paginated display. We believe that can positively reflect this move in advertising revenue in the long term. The YouTube advertising segment has felt the negative impact of Apple’s new privacy policy, making it difficult to target and analyze the effectiveness of advertising in the latest version of iOS. In this quarter, revenue growth was 43%. It reached $7.21 billion, falling short of the $7.40 billion forecasts.
Note that YouTube earns not only through advertising but also through subscriptions, and their number, according to management, recently exceeded 50 million. The operating loss of the Google Cloud segment with a forecast of $931 million was only $644 million. Revenue increased by 45% YoY to $4.99 billion, which is $80 million less than expected.
We assess the dynamics of the segment indicators positively. As the Google Cloud segment comes out of a loss-making state, consolidated EPS will grow, making corporate value estimates by multipliers even more attractive. According to management, in the fourth quarter, sales of gadgets will provide one of the drivers of revenue growth.
In particular, Pixel 6 smartphones recently have a proprietary Tensor mobile platform that works faster with AI algorithms. We are raising the target price for Alphabet shares from $3,100 to $3,500 on the back of unexpectedly strong results. We believe that investors may tend to fix positions in the short term since the paper has risen in price by almost 60% since the beginning of the year.
Same time, P/E NTM multipliers, the shares in the range of 25-26x, which continues to indicate their investment attractiveness;
especially since market participants have received confirmation that the negative impact of the new privacy policy in iOS on Alphabet’s advertising revenue is insignificant.
