Why Wall Street Loved Alphabet's Q3 Earnings

Investors were watching Alphabet (GOOG -1.81%) (GOOGL -2.06%) closely when the company reported third-quarter results late last month. In the prior quarter, revenue actually fell slightly on a year-over-year basis -- a surprising change in the narrative for a company that has steadily grown its top line on a year-over-year basis every quarter since going public in 2004.

In this segment of Fool Live recorded on Oct. 30, senior technology specialists Daniel Sparks and Danny Vena join "The Wrap" host Jason Hall to discuss how the tech company returned to growth in Q3.

Jason Hall: Daniel, Danny, who wants to lead off with what's going on with Alphabet? It's up about 4% right now, the opposite of the rest of the tech world and most stocks, and since that September second peak, the stock's held up a little bit. What's happening?

Daniel Sparks: I'll jump in on this one. This is a theme we've been talking about all week long as advertising companies report earnings, but the people underestimated the rebound that happened here in advertising revenue. The total revenue, which a huge portion as advertising from Alphabet, was up 14% year over year in the just-ended quarter. That was an acceleration from a 2% decline in the prior quarter. I think this is just continuing to take people by surprise and what we're seeing is just more interest in moving ad budgets to digital areas, which of course makes sense as digital acceleration we've seen. One of the things about digital is ad revenue can just be turned off and turned back on so quickly. When it is turned off, it can hurt pretty badly as we saw earlier this year, and when it's turned back on, it could ramp up. I think the move makes sense.

I'm just zooming out quickly on all three of these. These down moves from Apple and Amazon, investors should just plan for these, and your portfolios are very healthy to have declines. It doesn't feel like it when you watch your money fall, but they really are healthy to make sure that if we had stocks just running up high all the time, then the market just wouldn't work. But, yeah, happy to cover these, but Alphabet I think deserves this upside here, just an amazing company.

Jason Hall: Well, it's the one that if you think about 2020, a clear investing theme that has happened is tech stocks have done incredibly well as a category. Even though the tech sector is still down 12%, 15% from that September peak, the S&P 500 tech sector stocks have gone up 21%. That's far better than market. You think about Amazon, it's up 64%, Apple's up 45%. That's even with the sell-off, so stocks are still up that amount. Alphabet is basically performed with the S&P 500s. It's the one that has done by far the least best because of its model. Because it's tied to add revenue, so it's really tied to what's going on with the economy.

Yeah, so that's the big picture on that. Danny Vena, any extra thoughts to add on that?

Danny Vena: No, I agree with what Daniel said. There has been an unexpectedly strong rebound in digital advertising. It's important to remember that Google is by far the largest digital advertiser in the United States. But in the world, digital advertising essentially just got shut down, like Daniel said, when COVID hit because marketing executives started thinking, where are we going to save money on our balance sheet, on our income statement? What they did was they went straight to cutting the marketing advertising budgets. There was a quick rebound on that, I think that explains Google's move, and since Google has not participated in the tech rally like you talked about it, I think this is just tied directly to that rebound.