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Alphabet Inc. (NASDAQ: GOOGL), the new parent company of Google, yesterday unveiled its first quarterly earnings report since the company’s highly publicized restructuring.
Investors likely recall the major decision earlier this year to bring the company’s various operations under one roof. Going forward, Google will be a separate unit within Alphabet, which includes the core search business, Android, YouTube and Google Play. The other operating units – Nest, Google Fiber, Calico and Google Ventures –will continue to operate under Alphabet.
This is the final quarter in which Alphabet will report results as a single entity, and it sure went out with a bang: Alphabet earnings beat expectations for the quarter, and the stock promptly jumped 10% in after-hours trading.
Search Comes Through
For the quarter, Alphabet earned $7.35 per share on $18.68 billion of revenue. The results beat expectations on both the top and bottom lines. Analysts had expected $7.21 per share on $18.53 billion of revenue.
Total revenue grew 13% year over year, but Alphabet was weighed down by a very strong currency headwind. Excluding foreign exchange fluctuations, its organic revenue increased 21% year over year.
Over the first three quarters combined, revenue and earnings per share are up 12% and 25%, respectively.
Google’s flagship search business did a lot of the heavy lifting last quarter, particularly as it pertains to mobile search. Last quarter, aggregate paid clicks grew 23% year over year. Analysts had expected just 18% growth in this metric. Aggregate cost-per-click fell 11%, better than the 8% decrease projected by Wall Street. Traffic acquisition costs came in at $3.57 billion, which exceeded the $3.47 billion expected.
This was a very important quarter for Alphabet. Last quarter, investors and analysts raised concerns about the company’s position in mobile, as some had feared Alphabet’s search dominance would not transcend to mobile. And, analysts scrutinized new Chief Financial Officer Ruth Porat over Alphabet’s elevated levels of spending.
Judging by Alphabet’s results, it’s clear management took those concerns seriously and proved it can effectively manage expenses while still producing excellent top-line growth.
Alphabet’s Cash Mountain Grows
Alphabet ended the quarter in an even stronger financial condition. The company now holds $72.7 billion in cash, cash equivalents and marketable securities, which represents a 13% increase from the beginning of the year. At the same time, Google’s long-term debt fell to just $1.9 billion, from $3.2 billion at the start of 2015.
With its impressive cash pile, Alphabet is committed to buying back a lot of stock. This is the primary vehicle for the company to return cash to shareholders, since it does not pay a dividend.
Along with its quarterly results, Alphabet also announced that it will repurchase up to $5 billion of its Class C stock, which trades under the ticker symbol GOOG. Such a large buyback will greatly help earnings growth going forward.
Further Gains Ahead?
Heading into earnings, Alphabet stock had increased 28% since the beginning of the year, easily outperforming the S&P 500 index, which was nearly flat. The strong earnings report sent Alphabet stock soaring in the after-hours session, meaning the year-to-date returns are even more impressive.
Alphabet isn’t the cheapest stock around. Shares trade at approximately 30 times trailing earnings and almost 20 times forward earnings expectations. Analysts expect Alphabet to increase earnings by 16% next year.
But the company has proven an ability to beat earnings estimates. If the positive momentum continues, Alphabet stock may still provide investors with strong returns, even if its valuation is above the market average.
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