It's good to be a tech giant these days, as Alphabet Inc./Google (GOOGL - Get Report) , Microsoft Corp. (MSFT - Get Report) , Intel Corp. (INTC - Get Report) and Amazon.com Inc. (AMZN - Get Report) all showed this week.
The quartet all beat calendar Q3 estimates on Thursday after the close, helping propel the Nasdaq to record heights.
Excluding ad revenue-sharing payments with partners (traffic acquisition costs, or TAC), Google's parent company reported Q3 revenue of $22.27 billion (up 22% annually) and GAAP EPS of $9.57, beating consensus analyst estimates of $21.94 billion and $8.35.
Alphabet's stock rose 4.3% to $1,033.67 on Friday, an all-time closing high. Shares are up 32% for the year.
Here are three key takeaways from Alphabet's report:
1. Mobile search and YouTube remain giant growth engines.
The total number of ad clicks and impressions for which Google obtained revenue -- referred to by the company as paid clicks -- grew 47% annually, with 55% growth recorded for Google's own sites and apps. That's a slight slowdown from the 52% and 61% growth rates recorded, respectively, in Q2, but still faster than the preceding quarters and pretty remarkable in light of Google's size. Ad sales were also notably better than an estimate from industry research firm SMI suggested they would be.
Mobile search momentum is still the biggest driver behind paid click growth -- in spite of the ad growth Facebook Inc. (FB - Get Report) and to a lesser extent Amazon are seeing -- as advertisers continue viewing search as an indispensable way of reaching potential customers when they're looking to buy something. Google's efforts to create larger and more eye-catching mobile search ad formats, develop quality local and e-commerce ad solutions and let advertisers use their customer data to target search users are all paying off.
And in spite of recent advertiser boycotts and attempts to "de-monetize" politically-sensitive content, YouTube still appears to be doing well. Google, which in June said YouTube had over 1.5 billion monthly logged-in users, now says it also gets over 100 million hours of YouTube living room watch time each day. It also reports a 95% ad-viewability rate for the platform, well above the 66% rate Google claims other video ads see on average.
Partly offsetting the paid click growth: Google's average ad price, referred to as cost per click, fell 18% due to the lower average prices commanded by mobile search and YouTube ads relative to PC search ads. But that decline did narrow a bit from Q2's 23%.
2. Traffic acquisition costs (TAC) continue rising, and a new deal with Apple could be a factor.
TAC equaled 23% of Google's total ad revenue, up from 22% in Q2 and 21% a year ago. For Google's own sites and apps, TAC equaled 12% of ad revenue versus 11% in Q2 and 10% a year ago. While management has long admitted Google's growing reliance on mobile ads is boosting TAC (due to revenue-sharing deals with OEMs and wireless carriers), CFO Ruth Porat added this time around that "changes in partner agreements" also played a role.
As others have noted, there's a good chance that Porat is talking about a revised deal with Apple Inc. (AAPL - Get Report) While Google has been the default search engine for Apple's Safari browser for years -- Bernstein estimated earlier this year that Google will make $3 billion in related revenue-sharing payments to Apple in 2017 -- Apple also just made Google the default engine for iOS and macOS' built-in search features (Microsoft's Bing previously had the honor). It looks like Google agreed to revised revenue-sharing terms in exchange for the privilege.
3. Financial discipline is boosting margins.
While revenue rose 22% annually, operating expenses grew just 11% to $8.8 billion. This is partly due to shifts in the timing of Google's stock award grants, but even if one backs out stock-based compensation, opex grew less than 14%. Porat's efforts to reign in spending are clearly paying dividends (figuratively at least).
At the same time, Google (like a few other cloud giants) is still willing to spend heavily on its core infrastructure. Capital spending grew 39% to $3.5 billion.
Jim Cramer and the AAP team hold positions in Apple, Alphabet and Facebook for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL, GOOGL or FB? Learn more now.
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Editors' pick: Originally published Oct. 28.