Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) turned in strong second-quarter 2018 earnings on Monday after the market closed. The tech giant's revenue jumped 26% year over year to $32.7 billion, and earnings per share (EPS) adjusted for one-time items soared 32% to $11.75.
As it did in the first quarter, the bottom-line result sailed by Wall Street's expectation. Analysts were looking for $9.59 per share. These big earnings beats have helped propel Alphabet stock (both Class A and C) up nearly 21% in 2018 through Wednesday, versus the S&P 500's 7.6% return.
Earnings releases only tell part of the story. Here are three key things management shared on the earnings call that investors should know.
1. The importance of artificial intelligent dominated the call
From CEO Sundar Pichai's remarks:
The common thread you'll hear on today's call is the benefit of machine learning and AI, and how it's improving our products and generating great results for our users and partners.
From CFO Ruth Porat's remarks:
[W]e continue to identify new opportunities through innovation, including the benefits of applying machine learning to create more useful experiences for users and advertisers.
Both top execs talked a lot about the importance of artificial intelligence (AI) -- in particular, machine learning -- in helping the company improve its existing products and services, as well as in how it can help generate new sources of revenue. (Machine learning is a subset of AI that involves training machines to learn from data, rather than programming them.) Suffice it to say that the company -- which was the first mover in AI among the five biggest tech companies (which include Apple, Microsoft, Amazon.com, and Facebook) -- is pouring enormous amount of resources into maintaining an edge in this realm.
2. YouTube is "growing tremendously"
From Pichai's remarks:
[Our] video platform, YouTube, is growing tremendously. We launched our revamped YouTube Music service across 17 countries, and it's receiving great feedback from users and artists alike. This quarter, YouTube rebranded its subscription service, YouTube Premium, featuring originals like our hit series Cobra Kai, which got 41 million views the first episode alone.
Alphabet's YouTube, which is a business within its Google segment, doesn't get as much attention as it deserves. The world's largest video-sharing platform, which the company bought in late 2006 for about $1.65 billion, is not only "growing tremendously," but also has several avenues for monetization.
Growth in advertising, which is the primary way the site makes money, is "incredibly strong," said Sundar. The site is also in the early stages of making money from its Premium subscription service, which, for a monthly fee of $11.99 for individuals and $17.99 for families, allows users ad-free access to YouTube and YouTube Music, and access to its original TV series and movies. The company is aggressively adding original content -- and while it's not near the size of Netflix or Amazon Prime Video, there's a ton of growth potential.
3. Two companies (other than Waymo) move closer to commercialization
From Porat's remarks:
A couple of weeks ago, X announced that Loon and Wing have graduated to become independent companies under Alphabet. Graduation from X signals that these companies have reached certain technical and business milestones and that their focus is shifting toward commercialization.
Porat went on to say that Loon said last week that it's "partnering with Telkom Kenya to launch commercial service in regions of Kenya by early 2019." Loon's mission is to expand internet connectivity by using stratospheric balloons. As for Wing, it's developing autonomous delivery drones.
Google X is Alphabet's somewhat secret research and development lab, which it refers to as its "moonshot factory." It famously birthed Waymo, the company's self-driving-vehicle initiative. Waymo is on the cusp of commercialization, with plans to launch its first self-driving-car service in Phoenix later this year.
X should provide Alphabet with a stream of new sources of revenue over the long term, even if most of its moonshots don't pan out. Moreover, having such a lab is surely a boon to attracting top engineering and other tech talent.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Beth McKenna has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Facebook. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.