It seems nothing can slow the momentum in Alphabet's (GOOG -0.31%) (GOOGL -0.41%) search efforts or in cloud competitor Microsoft (MSFT -3.06%). Microsoft's growth is not quite as surprising, in that CEO Satya Nadella's plans to lead the budding cloud wars is taking hold after a couple of ho-hum years.
For Alphabet, a slowing of both top- and bottom-line growth would seem inevitable. After all, just how many more quarters and years can Alphabet continue reporting financial results similar to an early-stage, high-growth up-and-comer? However, the question got an emphatic answer when Alphabet shared another quarter of outstanding results.
With both tech behemoths hitting on all cylinders, the question of which is the better buy comes down to one thing: investor objectives.
Now that was impressive
Despite sky-high expectations, Alphabet handily beat analysts' third-quarter estimates. More impressive was how Alphabet generated its 20% jump in revenue to, $22.45 billion, and its 23% jump in non-GAAP (excluding one-time items) per-share earnings of $9.06. Alphabet also announced a $7 billion share buyback initiative to put at least some of its $83 billion in cash to work.
As for the Street, it was expecting Alphabet to continue growing, of course, but to the tune of $22.05 billion in revenue -- which still would have been an 18% improvement over last year's $18.68 billion -- and earnings per share of $8.63 excluding one-time costs.
Alphabet's aggregate cost per click (CPC) declined again last quarter, this time by 11%, but Alphabet once again overcame that by increasing the number of paid clicks by 33%, easily making up for its CPC decline. Alphabet's push to make its search more compatible with the world's mobile users was one of the primary drivers of its stellar quarter, according to CFO Ruth Porat.
Two other areas Porat credited for Alphabet's strong quarter bode well for the future. One is the monetization of YouTube. With over a billion users worldwide, more than half of whom are on mobile, YouTube dominates the world of online video and users are staying longer than ever before, which in turn boosts ad sales. Porat also said Alphabet's cloud results are picking up steam, but didn't share specifics.
Now the fun begins
Considering Microsoft's significant shift in business focus since Nadella took the helm in early 2014, its 3% increase in revenue last quarter was noteworthy. However, like Alphabet, more important still is how Microsoft is once again growing. The simple explanation is Microsoft's annual cloud revenue run rate of over $13 billion, pushing it to the top of the provider list.
Microsoft's cloud leadership position is due to its recognition that the largest revenue opportunity lies with business processing services, software-as-a-service (SaaS), and data analytics, not commoditized hosting. Microsoft's services cloud emphasis was demonstrated with yet another quarter of outstanding Dynamics CRM growth, along with both commercial and consumer Outlook 365 results.
Sure, Microsoft's Azure cloud platform revenue skyrocketed 116% and usage more than doubled. But Azure also drove a 51% jump in commercial Office 365 revenue, consumer sales climbed 8%, and Dynamic CRM results improved by 11%. The cloud SaaS and business processing markets combined are expected to generate more than $80 billion this year alone.
The closing of its $26.2 billion deal for LinkedIn (LNKD.DL) should happen this quarter, according to Microsoft. The potential synergies of LinkedIn's 460 million-plus professional members with Microsoft Dynamics, Office 365, and Skype are limitless. Product synergies aside, Microsoft may benefit the most by tapping into LinkedIn's member data, which its artificial intelligence and related solutions are ideal for.
So which is the better buy? Both Alphabet and Microsoft warrant strong consideration, but for pure growth, Alphabet's continuous top-line gains, mobile user appeal, and revenue drivers, including YouTube, earns it the nod. But for the more conservative investor looking for relatively steady growth and income, Microsoft's 2.6% dividend yield and cloud dominance makes it the better buy.