Alphabet (GOOGL) Tops EPS and Revenue Estimates But Shares Dip on YouTube and Cloud Miss, Analysts See Positive Risk/Reward Despite High Expectations

October 27, 2021 5:32 AM EDT
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Shares of Alphabet (NASDAQ: GOOGL) are down about 1% in pre-open Wednesday despite the company topping Q3 earnings estimates.

Alphabet reported Q3 EPS of $27.99 to smash the analyst estimate of $23.47. Revenue for the quarter came in at $65.12 billion versus the consensus estimate of $63.45 billion.

“Five years ago, I laid out our vision to become an AI-first company. This quarter’s results show how our investments there are enabling us to build more helpful products for people and our partners. Ongoing improvements to Search, and the new Pixel 6, are great examples. And as the digital transformation and shift to hybrid work continue, our Cloud services are helping organizations collaborate and stay secure,” said Sundar Pichai, CEO of Alphabet and Google.

As far as other metrics were concerned, GOOGL generated $7.2 billion from YouTube ads, which is lower than the analyst consensus of $7.4 billion. Google cloud revenue came in at $4.99 billion, again lower than the $5.07 billion expected.

On a more positive note, traffic acquisition costs (TAC) were reported at $11.50 to beat the $11.16 billion expected.

Mizuho analyst James Lee raised the price target to $3,350.00 per share from the prior $3,100.00 on the Buy-rated GOOGL stock to reflect higher estimates.

“Website revenue growth came in three points ahead of expectations at 44% YoY, due to a strong back-to-school season and limited impact from iOS. This outperformance was mainly due to strong demand from omni-channel and a mix shift from TV ad spending. Cloud grew 45% YoY, in line with expectations but strong underlying demand for BigQuery provides structural tailwinds. The biggest surprise was operating income, which was 15% ahead of expectations as core advertising margin improved six points YoY. With strong top-line growth and improved profitability, we are raising our FY23 EBITDA by 6% to $135bn,” Lee wrote in a note sent to clients.

Stifel analyst Scott Devitt also raised the price target to $3,200.00 per share from the prior $3,200.00 on “strong Q3 results.”

“Results across Google Services were ahead of our estimates with the exception of YouTube Ads, which recorded 3Q revenue approximately -1% below our estimate and -3% below consensus. Softer than expected growth in YouTube revenues was caused by Apple's recent privacy changes, which management highlighted as having a modest impact in the quarter. We expect headwinds related to IDFA changes will persist for YouTube in the near-term, and we are tempering our estimates for the segment as a result. Over time, we expect privacy changes that have limited the effectiveness of social-based advertising will cause a greater share of advertiser budgets to accrue to Google's core advertising products,” Devitt commented in a note.

Several other analysts also raised their price targets on the GOOGL stock, including BMO analyst Daniel Salmon (now $3,200.00) who still sees positive risk/reward from these levels despite a high bar of expectations.

Shares of Google closed at $2,786.17 yesterday.

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