Both classes of Alphabet (GOOGL 10.22%) (GOOG 9.96%) stock declined in Tuesday's after-hours trading, following the technology giant's release of its third-quarter 2023 report. Class A and Class C shares fell 6.1% and 5.9%, respectively.
These drops are largely attributable to Google Cloud growing slower than Wall Street had expected. That said, the quarter's revenue and earnings still managed to surpass the analyst consensus estimates.
Here's an overview of Alphabet's Q3 results, centered around four key metrics.
1. Revenue grew 11%
Alphabet's net sales increased 11% year over year (and 11% in constant currency) to $76.7 billion. Results were "driven by meaningful growth in Search and YouTube, and momentum in Cloud," CFO Ruth Porat said in the earnings release.
Traffic acquisition cost increased 6.9% year over year and decreased revenue by $12.6 billion.
| Segment | Q3 2023 Revenue | YOY Change |
|---|---|---|
| Google Search and other (advertising) | $44.0 billion | 11% |
| YouTube advertising | $8.0 billion | 12% |
| Google Network (advertising) | $7.7 billion | (2.6%) |
| Google advertising total | $59.6 billion | 9.5% |
| Google Other | $8.3 billion | 21% |
| Google Services total | $68.0 billion | 11% |
| Google Cloud | $8.4 billion | 22% |
| Other bets | $297 million | 42% |
| Hedging gain (loss) | ($1 million) | Flipped to negative from positive $638 million in year-ago period |
| Total | $76.7 billion | 11% |
Data source: Alphabet. YOY = year over year.
For context, in the prior quarter (Q2 2023), revenue rose 7% year over year (and 9% in constant currency) to $74.6 billion. Total ad revenue edged up 3.3% year over year. Revenue from Google Cloud, Google other, and other bets grew 28%, 24%, and 48%, respectively.
In Q3, YouTube was a bright spot -- with its 12% ad growth. That's a nice turnaround from the video-streaming platform's recent struggles, likely due in large part to increased competition from TikTok. In Q1 and Q2 of this year, YouTube's year-over-year revenue fell 2.6% and rose 4.4%, respectively.
Google Cloud's $8.4 billion in revenue fell short of Wall Street's expectation of $8.6 billion. This business's year-over-year revenue growth decelerated on a sequential-quarter basis. It was 28% in Q1 and Q2, and 22% in Q3. This dynamic has some investors concerned, as this unit has generally been the company's revenue growth engine.
For context, Microsoft's Azure and other cloud services revenue grew 29% year over year in its fiscal first quarter. The company also announced its quarterly earnings after Tuesday's closing bell. Investors will get additional context on Google Cloud's performance this Thursday when Amazon reports its Q3 results, which will include those for its cloud computing business, AWS.
2. Operating income jumped 25%
Operating income rose 25% year over year to $21.3 billion. Operating margin (operating income divided by revenue) was 28%, up from 25% in the year-ago period. Operating income, as well as net income, got a boost from cost savings stemming from the company's layoffs over the last year.
Google Services (includes the company's core ad business plus Google Other, which is heavily comprised of hardware) generated an operating profit of $23.9 billion, up 27% year over year. This segment's operating profit benefited from the company moving Google DeepMind, its artificial intelligence (AI) research operation, from falling under Google Services to being a part of unallocated corporate costs.
Google Cloud turned in an operating profit of $226 million, up from a loss of $440 million in the year-ago period.
Other bets had an operating loss of $1.2 billion, which is 2.5% wider than the loss in the year-ago quarter.
3. EPS surged 46%
Net income landed at $19.7 billion, or $1.55 per share, up 46% from the year-ago period. Wall Street was looking for earnings per share (EPS) of $1.36, so the company easily beat this expectation.
4. Operating cash flow grew 31%
Alphabet generated cash of $30.7 billion running its operations in the quarter, up 31% from the year-ago quarter. It ended the period with cash and cash equivalents of $30.7 billion, up 40% from the end of 2022.
A solid quarter
In short, Alphabet had a solid quarter, with a nice turnaround in ad growth. That said, it's understandable that some investors are somewhat concerned about the sequential deceleration in Google Cloud's revenue growth. But for long-term investors, performance over just one or even two or three quarters is too short a period to judge any business or any unit of a business.
