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Alphabet Slays Earnings but Falls on Its Sword With Cloud

Published 11/07/2023, 02:04 AM
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  • Alphabet reported a Q3 2023 EPS beat of 9 cents on 11% YoY revenue growth to $76.69 billion.
  • Google Cloud Platform (GCP) revenues grew 22% but decelerated from the 28% YoY growth it had in Q2 2023, causing shares to collapse 10% as the only blemish in its earnings report.
  • YouTube Ad revenues rose 11.3% to $7.9 billion as YouTube Shorts grew to 70 billion daily views.
  • Alphabet (NASDAQ:GOOG) reported its Q3 2023 earnings with impressive results. Unfortunately, shares fell nearly 10% in the aftermath, stemming from one blemish in the report, Google Cloud Platform (GCP). It’s not that its cloud business didn't grow. In fact, its revenues grew 22% YoY to $8.4 billion, generating $266 million in operating income.

    The disappointment came from not growing enough compared to the 28% YoY growth in the prior quarter. Deceleration and cloud are two words that can't be in the same sentence without incurring consequences. However, investors may have rushed to the exits prematurely as the rest of the businesses had stunning results.

    Top Line Returns to Double-Digit Growth

    Alphabet (NASDAQ:GOOGL) returned to double-digit revenue growth after four prior quarters of single-digit growth. Revenues grew 11% in Q3 2023 to $76.69 billion, beating consensus estimates for $76.02 billion. Google Search and Other revenues grew 11.4% to $44 billion. Other Revenues grew by 23% YoY and include YouTube Premium subscriptions, which are ad-free, YouTube Red and YouTube Music and Google Play Store purchases and licensing revenues.

    Hardware sales include Chromebooks, Pixel smartphones, tablets and watches, Chromecast streaming devices, Fitbit (NYSE:FIT), Google Glass, Nest smart home devices and accessories. Google will sell AI-powered services like chatbots and license its AI technology. Google is developing and winning customers with AI-powered hardware like its Cloud Tensor processing unit (TPU) v5e, its most cost-efficient and versatile accelerator.

    Advertising Revenues Rebound

    The digital advertising slump may be in turnaround mode, at least for Google. YouTube Ads revenues grew 11.3% to 7.9 billion. YouTube Shorts, 15-second videos that can be up to 60 seconds long to combat TikTok videos, now receive 70 billion views daily, up from 50 billion in Q4 2022. However, that number pales compared to Meta Platforms (NASDAQ:META) Instagram Reels, which had 200 billion daily views in Q2 2023. Total Google Advertising revenues grew 9.4% YoY to $59.6 billion. YouTube remains the number one streaming platform, with over 150 million active monthly users.

    Profits and Vertex

    Alphabet GAAP EPS was $1.55, beating analyst estimates by 9 cents or 6%. It's worth noting that Alphabet had a lower tax rate of 7% versus 16% expectations, which added 15 cents to EPS. Google Cloud experienced deceleration as customers were optimizing their spending, meaning cutting back on spending. However, AI interest is very strong, with Vertex (NASDAQ:VRTX) seeing 7X more projects sequentially. Google Vertex is its unified AI platform with tools and services for developing and managing AI applications at scale. The demand for AI could stabilize its cloud business.

    Google Gemini

    Gemini is a suite of large language models (LLMs) developed by Google AI. It's being developed to be much more powerful and versatile than Bard and PaLM 2. It's designed to be multi-modal, which includes generating text, image, code, and audio content. Gemini is still being developed and trained to perform a diverse range of tasks like translating language, following instructions, completing requests and generating creative text formats like scripts, code, poems, music, and email to letters.

    It can be used to create synthetic media, including audio recordings, images and video like special effects and virtual reality experiences. Google plans to use it across all its products and services, as well as making it available to developers and cloud customers through Vertex. It's a collaboration with the Google DeepMind team to build the foundation for the next generation of models, which it plans to launch in 2024.

    CEO Comments on Google Cloud

    Google CEO Sundar Pichai commented on Google Cloud, “We see continued growth with Q3 revenue of $8.4 billion, up 22%. Today, more than 60% of the world's 1,000 largest companies are Google Cloud customers. At Cloud Next, we showcased amazing innovations across our entire portfolio of infrastructure, data and AI, workspace collaboration, and cybersecurity solutions.” He noted, “And today, more than half of all funded Generative AI startups are Google Cloud customers. This includes AI21 Labs, Contextual, Elemental Cognition, Rytr and.”Alphabet Inc.-Weekly Chart

    Weekly Cup and Handle Pattern

    The weekly candlestick chart on GOOGL illustrates a cup and handle pattern. The cup lip line commenced in March 2022 at $141.22 preceding the selloff to the $83.34 low by Oct. 2022. GOOGL formed a rounding bottom for months until it triggered the weekly market structure low (MSL) trigger at $126.78 breakout in July 2023.

    Shares retested the $141.22 cup lip line by October 2023 before deflecting and falling back down on Q3 2023 earnings. GOOGL coiled off the $120.21 to commence handle formation on the MSL trigger breakout. The weekly relative strength index (RSI) is attempting to bounce off the 50-band. Pullback supports are at $120.21, $115.35, $109.17 and $104.07.

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