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Jim Cramer's Action Alerts PLUS

Google Is Still a Tech Leader

By Jim Cramer and Jack Mohr | 07/28/16 - 06:22 PM EDT
Stocks in Focus: GOOGL

After the bell Thursday, Google (GOOGL:Nasdaq) posted an incredible top- and bottom-line beat, continuing what has been a very strong tech earnings season for the AAP Portfolio, beginning with Apple (AAPL:Nasdaq) and then Facebook (FB:Nasdaq).

Alphabet’s EPS of $8.42 shattered consensus of $8.03 and total revenues of $21.5 billion topped consensus expectations by roughly $750 million.

Shares are surging in the after-hours, up around 5%, a move that we view as justified considering the 21% year-over-year revenue growth (25% in constant currency) and continued discipline on the expense side, led by CFO Ruth Porat.

But the stock has rallied roughly 13% in the last month and the immediate reaction on these results could pull back throughout the night and tomorrow as investors look to take profits and the naysayers from the sell-side highlight an increased valuation. We saw the pullback in FB today, so a similar move in GOOGL wouldn’t be surprising. But we applaud GOOGL management for delivering another spectacular beat.

Digging deeper into the results, free cash flow rose to nearly $7 billion, up from $4.5 billion in 2Q15, highlighting the company’s incredible optionality and operating leverage embedded within this company's business model, not to mention the cost discipline CFO Ruth Porat has instilled since joining the company.

On that note, capital expenditures of $2.12 billion came in well below expectations and was down from last year’s $2.52 billion in 2Q. Once again, Ruth Porat’s influence is evident, infusing her discipline throughout the company’s practices. We cannot overstate magnitude of her expertise, drawing upon many years as finance chief atop one of the most complex, bloated global institutions (Morgan Stanley (MS:NYSE)) and translating that knowledge to the tech equivalent.

On some of the core operating metrics, total paid clicks grew 29% y/y, beating consensus expectations that called for 25% growth. Cost per click fell 1% sequentially and 7% y/y, slightly worse than expectations for a 4% drop, but better than the 9% y/y drop in 1Q. A shift towards smartphone and YouTube ads has been weighing on prices, but the company has made aggressive moves to create more effective mobile search ads, so we will be listening for some more color on the call.

Moving onto the segments, Google’s core revenues of $21.32 billion grew 21% y/y. Google website gross revenue of $15.4 billion ccelerated to 24% growth y/y, exceeding consensus of $14.8 billion. Total Google gross advertising revenue of $19.14 billion (+19% y/y) was also impressive, accelerating sequentially from +16% y/y in 1Q16. Core Google’s other segment rose 33% to $2.2 billion, potentially indicating meaningful growth in the cloud. Google ad revenue rose 19% to $19.1 billion, better than Q1's 16%. While the Other Bets segment, which includes Google’s moonshot investments like Google Fiber, incurred a loss in the quarter, this was widely expected and further highlights the savvy move by management to break apart its segments to emphasize core Google’s profitability. Other Bets revenues did grow 150% y/y.

Importantly, on the ongoing call, Ruth Porat noted continued growth in YouTube and mobile as being key drivers in the company’s growth. Even so, desktop and tablet traffic, she mentioned, also experienced solid growth. While the company doesn’t breakout YouTube’s specific results, the positive commentary continues to be an encouraging sign for this important growth asset. YouTube is one of Google’s 7 platforms that boasts 1 billion-plus users.

What can we say? This was a fantastic quarter, with core Google’s dominance and Ruth Porat’s capex discipline on full display. There had been some concerns from sell-side in the weeks leading up to the quarter regarding potential share loss or impacts from Brexit, but the company flexed its muscles and showed its resilience. Management even noted that it has not yet seen a negative impact from Brexit on its ongoing results. We continue to view Google as a leader in the large-cap tech space and believe it has a long road to run.


Jim Cramer, Portfolio Manager & Jack Mohr, Director of Research
Action Alerts PLUS

DISCLOSURE: At the time of publication, Action Alerts PLUS was long GOOGL.

We Come Not to Bury Facebook Research, but to Help It
Stocks in Focus: FB

We are very comfortable raising our price target.

07/28/16 - 04:26 PM EDT
AEP Beats the Consensus
Stocks in Focus: AEP

We see today's muted market reaction to the results as a reflection of the approximately 19% rise in the shares since the start of the year.

07/28/16 - 02:55 PM EDT
Weekly Roundup

Stocks have an up-and-down week as the earnings floodgates open. Portfolio moves include cutting one position.

07/22/16 - 06:41 PM EDT

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Action Alerts PLUS Holdings

Holdings 1

Stocks we would buy right now

Symbol % Portfolio
Industry Trade Now
AAPL 3.41% Consumer Durables
AGN 5.10% Drugs
C 3.96% Banking
CSCO 4.75% Computer Hardware
DOW 3.16% Chemicals
FB 4.99% Internet
GE 2.93% Industrial
GOOGL 4.58% Internet
NXPI 3.37% Electronics
PNRA 4.42% Leisure
SBUX 2.79% Leisure
SLB 3.15% Energy
V 3.40% Financial Services
WBA 3.65% Retail
Holdings 2

Stocks we would buy on a pullback

Symbol % Portfolio
Industry Trade Now
AEP 1.37% Utilities
CMCSA 1.62% Media
COST 2.66% Retail
KHC 1.71% Food & Beverage
LMT 1.52% Aerospace/ Defense
OXY 1.99% Energy
PEP 3.88% Food & Beverage
PG 3.38% Consumer Non- Durables
PYPL 1.78% Financial Services
TMO 2.22% Health Services
WFC 4.03% Banking
Holdings 3

Stocks we would sell on strength

Symbol % Portfolio
Industry Trade Now
TWTR 0.46% Internet