Google Search Ads Returns to Growth; Alphabet Executes

While Alphabet GOOG is battling the Department of Justice and U.S. and international lawmakers on antitrust, Section 230, and other regulations, it continues to impress financially. The firm reported another strong quarter, with growth in all areas driving top- and bottom-line results above our projections and the FactSet consensus estimates. With the better-than-expected third-quarter results and increasing confidence in digital ad demand, we have increased our projections, resulting in a $1,980 fair value estimate, up from $1,800.

Alphabet’s Google benefited from increases in brand and direct-response digital ad spending as search and YouTube ad revenue grew during the quarter. In addition, the firm’s cloud segment continued its strong double-digit growth. As the economy recovers, we expect digital ad spending to accelerate, from which Google will be one of the main beneficiaries. Google also remains well positioned to continue to grab its fair share of the fast-growing cloud market.

Alphabet’s total revenue increased 14% year over year to $46.2 billion, driven by growth in ad and other revenue (which includes the cloud business). Search ad revenue of $26.3 billion returned to year-over-year growth (6.5%) after the pandemic-driven decline in the second quarter. YouTube ad revenue increased 32% from last year (compared with only a 6% increase in the previous quarter) to $5 billion as the platform continued to attract direct-response advertisers. Increased demand from brand advertisers also contributed to growth.

Google’s cloud revenue jumped 45% year over year to $3.4 billion, driven by the increasing demand for digital transformation. Adoption of Google Workspace continued to improve as the number of seats as well as average revenue per seat increased during the quarter.

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