Shares of Alphabet jumped in late trading Tuesday, after the company smashed investor expectations, reporting record quarterly revenue.
The Google parent reported second-quarter net income of $18.5 billion, which amounts to $27.26 a share, compared with a net profit of $7 billion, or $10.13 a share in the year ago period. Revenue rose 62% to $61.9 billion.
Wall Street’s consensus estimate was for earnings of $19.35 a share on revenue of $56.2 billion.
CFO Ruth Porat attributed the company’s success to “elevated consumer online activity” and “broad-based strength in advertiser spend.” The company reported Search and other revenue of $35.9 billion, and YouTube ad revenue of $7 billion—both ahead of investor expectations.
Traffic acquisition costs, or TAC, which are the fees Google pays to the likes of Apple (AAPL) for search deals, amounted to $10.9 billion in the second quarter.
Google business chief Philipp Schindler said that retail did the most to grow the company’s ad business, and that travel, financial services, media, and entertainment also were “strong contributors.”
Alphabet was widely expected to have a strong quarter, in part because the first half of 2020 was a dismal one for the digital ad market. Amid fears about the Covid-19 pandemic, many companies yanked advertising spending, which slowed or reversed the growth of several tech companies including Alphabet.
“The numbers are crazy strong, across almost every segment of the business, and they’re accelerating,” RiverPark Funds investment chief Mitch Rubin said. “On top of that, you have extraordinary expense control, which I think the market has been looking for for years.”
But the weak quarter last year meant that investor expectations were high heading into Tuesday’s afternoon of tech earnings. The digital ad giants were expected to top estimates and issue bullish guidance.
Alphabet did not issue a forecast with its earnings release. Porat said in a conference call late Tuesday that it is still too early to begin forecasting, as markets reopen, and Covid-19 cases increase around the world.
Aside from Alphabet’s ad business, Google’s Cloud computing segment reported over a 50% rise in second-quarter revenue to $4.6 billion. The cloud segment’s operating loss was trimmed to $591 million, from $1.4 billion a year ago. That loss was significantly less than analysts expected, though Porat said the company continues to aggressively in the business.
Because Alphabet has been trying to catch up with Amazon.com (AMZN) and Microsoft (MSFT) in the cloud business, investors had expected Google Cloud to keep losing big money, Rubin said. Cloud computing, he said, is a high-margin industry, and if Google can flip its cloud segment toward profitability, it could boost the company’s bottom line.
“When you turn the cloud to profit, earnings at the company skyrocket,” he said.
Alphabet gave investors another reason to cheer, saying the board had given the company the option to repurchase Class A shares in addition to the Class C stock that was part of its existing buyback program. In April, the company authorized an additional $50 billion buyback of class C shares.
Alphabet shares were up 3.1% in after-hours trading. The stock closed down 1.6%, to $2,638, in regular trading Tuesday.
Alphabet is up 51% this year, while the S&P 500 index is up 18%.
Alphabet Earnings Manage to Beat Big Expectations. The Stock Is Rising. - Barron's
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