Highlighting a somewhat muted response from investors, Alphabet (GOOG 1.43%) (GOOGL 1.42%) stock is trading about 0.4% lower at the time of this writing on Friday after the company reported its results for the fourth quarter of 2016. While revenue jumped 22% to $26.1 billion and surpassed analysts' consensus estimate (via Thomson Reuters) for revenue of $25.2 billion, the company's earnings of $9.36 per share fell short of a projection for $9.64.
As investors digest the information from Alphabet's latest report, here's a look at some of the most insightful comments from the company's fourth-quarter earnings call. In these quotes, management discusses the success of the new Google-branded hardware, further opportunity in advertising, and what it considers the three biggest bets for the company beyond its core ad business.
Google Pixel. Image source: Google.
Alphabet's core search business hasn't peaked -- far from it
After pointing to the company's impressive 20% consolidated revenue growth in 2016, which management emphasized is actually 24% when excluding the impact of currency headwinds, Alphabet CFO Ruth Porat emphasized (via a Reuters transcript) the opportunity ahead:
This performance is a testament to the ongoing innovation that is driving our success in mobile search, YouTube, and programmatic advertising, each of which we believe has only begun to scratch the surface. We remain excited about the sizable opportunities that have not yet been tapped.
These could become major revenue drivers
With about 86% of Alphabet's total revenue coming from advertising, it's always nice to get an update on whether the company is seeing success on diversifying its revenue sources. To this end, Alphabet made excellent progress in its fourth quarter. Here's what Porat had to say:
Alongside these [advertising] businesses, we are focused on growing additional revenue streams within Google over the medium- and long-term. In 2016, our other revenue line grew 41% on a full year basis reflecting the growth in our Play, hardware and cloud businesses. We see tremendous potential ahead for these businesses, as well as in the continued development of non-advertising revenue streams for YouTube. We're investing in our cloud and hardware businesses, as well as our newer non-ad revenue sources for YouTube, in order to accelerate their progress as major revenue drivers for Google in the next several years.
Alphabet's other revenue growth in the Google segment (not to be confused with Alphabet's "other bets") was even more impressive in the company's fourth quarter specifically. Fourth-quarter other revenue soared 62% year over year, to $3.4 billion, accounting for 13% of total revenue, up from 10% of revenue in the year-ago quarter. Management cited hardware, the Google Play app store, and its cloud business as key drivers for the segment.
Google Home. Image source: Google.
Google-branded hardware looks promising
Drilling down more narrowly on the company's nascent hardware business, which received some extra attention from the company in the fourth quarter when Google launched its voice-activated smart speaker (Google Home) and a new smartphone (Google Pixel), management was optimistic about how new hardware is performing in the marketplace. Google CEO Sundar Pichai explained:
We introduced a new family of beautiful hardware devices in October that are made by Google, led by Google Home and our Pixel phone which feature the Google Assistant built in. We're thrilled with the reception, as well as the really happy customers we saw over the holiday season. In particular, Google Home was a very popular present that many people opened on Christmas morning. We have committed to this for the long-term, as a great way to bring a beautiful seamless Google experience to people. The early signs are promising, and you can expect us to see us expand our offerings thoughtfully.
Alphabet's three big bets
Pichai said that beyond its core advertising business, the company distinctly views "YouTube, cloud and hardware" as "three of our biggest bets." So investors should keep an eye on these areas as Alphabet continues to grow its business.
Management's extreme confidence in incremental opportunity in Alphabet's core search business, along with significant and promising growth in YouTube, cloud, and hardware, continues to make a great case for owning this stock. Not only is the company strengthening the competitive position of its core business, but it's also diversifying its revenue while simultaneously opening the doors to meaningful opportunities beyond advertising.
