- Double-digit growth looks sustainable for several fiscals.
- The industry’s growth prospects will support Alphabet’s core revenues.
- Any successes in the Other Bets segment could drive GOOGL stock way higher.
Alphabet Inc's (NASDAQ:GOOG) third quarter earnings clearly showed that the company’s double-digit earnings growth is far from over. Google’s parent company reported solid third quarter numbers that saw revenue surge by 20% compared to the year-ago period, as the advertising giant’s trend of increasing aggregate paid clicks coupled with declining cost per click continued. While Alphabet's core growth engine, Google, is poised for strong growth over the next 5 years, any successes in the Other Bets segment could drive the stock way higher.
Numbers speak of growth in core areas - mobile and video
Alphabet posted adjusted earnings per share of $9.06 and revenue of $22.45 billion, beating analyst expectations of $8.63 earnings per share and revenue of $22.05 billion by a wide margin. Alphabet is experiencing a lot of momentum in the mobile and video segments, as the world shifts from desktop-based content consumption to mobile-device-based consumption. Quoting Alphabet CFO, Ruth Porat, from the 3Q Earnings Call:
“For the quarter, our consolidated revenue grew 23% in constant currency versus last year, notwithstanding a challenging year-on-year comparison. Once again, the primary driver was Mobile Search, with ongoing strength in YouTube and important contributions from programmatic advertising and Play.”
Traffic Acquisition Costs (TAC) as a percentage of advertising revenues have been stable around the 21% level this year. TAC is the amount of money Alphabet pays to vendors to bring in traffic to its web properties, and that has grown by 17% year over year and 5% sequentially during the third quarter, as Google’s new growth drivers - Mobile Search and Programmatic Advertising - carry higher TACs. That’s not the best place to be in, because TAC is going to keep moving upwards as consumption on mobile devices keeps rising.
Gaining Time for Other Bets to Bear Fruit
Alphabet’s Other Bets steadfastly remained as “other bets”, with nothing significant happening in that segment. The company keeps pointing investors towards long-term benefits while analysing Other Bets, but the fact that Google had more than six years to work on its Google Fiber project with hardly anything to show for it is, indeed, a bit depressing.
Nevertheless, advertising revenues continue to climb, and the overall healthy state of the industry will allow Google to defer its Other Bets for now and keep concentrating on benefits from ad revenue growth in the near future. Google and Facebook are the two biggest players in the digital advertising market, which is forecast to nearly double in the next five years.
What is interesting to note in the forecast is that a major portion of that growth is expected to come through the mobile and video segments, areas in which Google is already experiencing strong momentum thanks to YouTube and Mobile search traffic. As such, Alphabet seems to have quite a long pipeline for growth in ad-revenues, with the lower estimate being at least about five years - enough time for them to oversee Other Bets and get at least one of them to produce some real results. So, while Alphabet's Google segment looks poised for solid growth in the years to come, even one decent success in the Other Bets segment could drive the stock way higher. Evaluating technology stocks? Check out Amigobulls' top tech stock picks, which have outperformed the NASDAQ by over 115%.